As we head towards 2022, the economy looks way more upbeat than what it did this time last year. As markets opened up, businesses across a spectrum of industries slowly started getting back on their feet. The festive season sales too provided a real shot in the arm. So as businesses look forward to a 2022 filled with growth opportunities, securing funds to fuel that growth would be at the top of their wish list.
Hassle free funding is a prerequisite for smooth scaling and expansion of business; and business loans are an important funding source helping owners pump more capital without altering the structure of ownership. However, securing a business loan can be a cumbersome process for many. Especially for small businesses, securing loans may seem like a tedious task with a maze of terms and conditions and offers to navigate through.
Business loans in India witnessed 17% growth in Originations by value from FY17 to FY20, followed by almost 2X Y-o-Y growth in Originations (by volume) from FY20 to FY21. As opposed to last decade, securing loans has become much easier today as a number of NBFCs have emerged to offer loans at flexible terms and conditions. However, considering a few important factors while applying for a loan can increase your chances of loan approval.
Listed below are a few factors that businesses must take into account before proceeding with the loan application process
1. Determine the loan size
When applying for a loan, it is best to have a crystal clear picture of the exact amount you will require for your business operations. The amount you apply for will dictate the interest rate and repayment terms. Applying for a loan based on a rough estimate won’t be the right approach as shortage or excess of funds are both unfavorable situations. The former would interrupt smooth functioning of business while the latter would mean costly interest. Having absolute clarity on the amount also helps zero in on the right lending partner. Different lending institutions have different maximum sanction limits and knowing the exact amount comes in handy when choosing the right lending partner. Remember to take the processing fees too into account.
2. Understand lender-specific eligibility requirements
When taking a business loan, it’s necessary to meet the eligibility criteria laid down by the lending institution. Before you go ahead with the loan application, it is advisable to get into the specifics of these eligibility requirements. Businesses are required to submit a few documents before they are declared eligible for the loan. Choosing lending institutions without a good understanding of the eligibility criteria would only result in loan applications getting rejected, further wasting your precious time. Understanding the eligibility requirements helps draw effective comparisons between different lenders, giving businesses a better opportunity to scout for the right offers.
3. Research your lending options
There is certainly no dearth of lending institutions in our country but finding the right one may be a tricky task in hand. Businesses can go for traditional lending institutions as usual or opt for non-traditional lenders. While the ultimate decision is to be made by the owner after weighing the pros and cons, it’s a fact that there are multiple benefits that non-traditional lenders offer today. Digital provisions for loans coupled with quick approvals and flexible repayment terms are some of the perks offered by non-traditional lenders. As a business owner, securing loans with business-friendly terms is critical for hassle-free functioning. Investing some time in research would certainly pay off in the long run.
4. Consider disbursement time
The definition of quick approval may differ from one lender to another. Quick approval may mean a few days to some lenders whereas weeks or months for other lenders. It is important that the bank’s disbursement policy is in line with your expectations. If you are in urgent need of funds to seize a lucrative business opportunity, you need a lending institution with minimal loan processing time. Enquire about the disbursement process well in advance so you know if the chosen lender is right for your funding requirements.
5. Read the fine print
It is important to discuss everything with the lender before signing the agreement. You may be faced with a variety of situations such as inability to make the monthly repayment on the agreed date after receiving the loan. Business owners must have a thorough understanding of the lender’s flexibility in terms of loan repayment. Often, business owners overlook the important details buried under the fine print and find themselves struggling to fulfill the terms and conditions in the face of a crisis. Learn the payment structure in detail so the terms won’t seem like a bolt from the blue in case of a default.
While most business owners are tempted to make decisions based solely on interest rates, it is important to consider a few other factors like the ones discussed here. Businesses need to be cautious of the lending terms as any kind of setback may prove costly in the long run. Business needs can vary between large and small expenses such as asset purchase or salaries and overheads. Irrespective of the type of loan, considering these five factors can help you secure a good deal for your funding requirements and ultimately prime your business for success.
Views expressed in this article are the personal opinion of Alok Nag, Founder – A&H Capital.