Running a business is no easy task. And, if you are starting a new venture with a completely new idea, the road to success becomes much more challenging. The only way to overcome the challenges and run the business successfully is to have adequate funding.
For new businesses and entrepreneurs, there are plenty of financing options available including business loans. Therefore, you need to research the financing option that will work best for you.
Here are the 7 useful business tips for young entrepreneurs looking for a business loan that will help you make an informed choice.
Before applying for an online business loan, you should have clarity on the purpose of seeking a business loan. Whether it should be utilized for funding growth, making a new acquisition, working capital requirements etc.
For example, if you are seeking funding to meet working capital needs, you can consider taking a business line of credit, which is approved immediately. You need to weigh the pros and cons of each business loan type, and whether it meets your objective and business needs.
For any new business, it takes time to settle in the market and generate enough cash flows from business operations to sustain on its own.
Therefore, as an entrepreneur, you need to decide on the loan tenure and repayment amount accordingly. It is better to go for a flexible timeline, with repayment tenure stretching up to 5 years. It will give you enough space to focus on your business, rather than prioritizing repayments.
Always compare the different funding options available with different lenders and the type of business loan that suits your business requirements.
Also, check the lender’s background, review given by borrowers, time taken to approve the loan, and other necessary factors before finalizing the lender and business loan type.
In any loan type, the interest cost is greater than any other type of cost associated with the loan. Also, you cannot ignore it, as a small difference in business loan interest rate percentage can have a huge impact on the total cost of the loan over the repayment tenure.
While comparing the interest cost, instead of checking the annual rate of interest charged by the lender, you should focus on APR or Annual Percentage Rate.
APR reflects the actual yearly cost of the loan and is a more effective metric when it comes to comparing the cost of the loan. It includes the base interest rate plus all the costs (processing fee, service charges) to avail of the loan.
Before approving a business loan, the lender verifies the financials of the business, whether the business is profitable or not and can generate enough cash flows to meet all the expenses efficiently. Please note that most lenders do not provide business loans to applicants who do not have an existing business or one that does not match their business loan eligibility criteria. Thus, if you are planning to start your business from scratch for the first time, you can consider taking a personal loan (if you plan to keep working at your job on the side) or looking for alternative funding options. You can also ask a close family member with a good credit score and stable income to take a personal loan on your behalf.
If you do have an existing business and match the required criteria, please also note that before applying for a business loan, do detailed market research, a report on the viability of the business with financial projections for the next three to five years. This will help the lender to establish confidence in your business and approve the business loan. You should note, lenders refrain from financing risky businesses, which are untested in the market and have a low rate of success.
Keep all business loan documents handy including bank statements, cash flow statements, income statements, balance sheets, ITR for the past two years and legal documents like trade license, certificate of incorporation, GST certificate, etc.
There are various government-backed loan schemes targeted towards promoting start-ups, MSMEs, SMEs, in India. For example, MUDRA loan, Stand-up India scheme, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), etc.
Such loan schemes offer many benefits to business owners and entrepreneurs, for example, tax benefits under various sections of the IT Act, interest rate concessions, and flexibility in repayments.
Apart from the business financials, lenders also pay close attention to the creditworthiness and credit behaviour of the business owner. For example, having a credit score lower than 700 can affect your business loan eligibility. Also, having multiple loan accounts is not considered a good sign by lenders, as it indicates, you have a high dependency on credit.
Always check your business loan eligibility before applying, as any hard inquiry on your credit report can negatively impact your credit score.
Managing finances efficiently is crucial for the success of any business, whether it is a start-up or an established business house. You should weigh the pros and cons of every financial decision before implementing it.
The tips for entrepreneurs to be successful in availing a business loan in favorable terms will help you in making the right financing choices and let your business grow in scale.