The first thing that comes to your mind when you hear the term loan is the liability or maybe interest. Yes! These both terms divert your mind and send you into a situation known as ‘stress’ to most of us. Loans are a way to fulfill your needs and divert it to a better lifestyle. Most of us borrow loans from the financial institutions to overcome our financial weaknesses. Also, a major chunk of this market i.e. the financial market where banks function goes into the financing of the SME or MSME institutions. SME or MSME are the Small Medium Enterprise which holds a major chunk of our economy and are responsible for the contribution of employment to the Indian economy in 4/5 cases. But, the SMEs lack the knowledge and the funding to start new businesses. This becomes a barrier for them. To overcome this problem we, Finance Buddha provide you with business loans for your SME and also guide you about it that how you can opt for a loan and what are the criteria and other details in a meticulous way. Here, is the guide to SME business loans and the things to be kept in mind before applying.
7 GUIDING STEPS TO SME BUSINESS LOANS IN INDIA
The first step towards any business loan is the purpose of the business loan. You must know the purpose of your loan and the requirement that is necessary to be fulfilled at that particular stage in the business. The level of importance decides the need for a loan for a particular business. The needs can be of many types such as expansion of the business especially to a new location or a new city, launch of a new product in the market to satisfy the gap, warehousing, running a campaign for the promotion of a new product, marketing of the company, hiring new employees in the company and many other purposes come into the picture when you have insufficient funds to fulfill them. These purposes or needs can be fulfilled when you take a business loan for your SME. The purposes may differ based on the sector you are into i.e. manufacturing or service.
You must check the eligibility for the loan before taking the loan from a financial institution as they may reject your proposal if you are not appropriate. The eligibility criteria for different institutions are different when you go for a business loan. But, these are some basic things that you should consider in mind when you go for a business loan. You must, first of all, check your CIBIL score before applying for a business loan. A CIBIL score is the credit score which is a mirror reflection of your credit ability in the market. Also, the eligibility differs from the nature of the business you are into i.e. manufacturing and services. If you are an existing business then you should update your financial records, calculate the net worth of your assets and maintain your bank statements if you are applying for a business loan. Other documents may also be asked for if the financial institution needs them for further verification. They might also ask for the business model and your previous documents if you already have a business and your profit and loss account and balance sheet.
- Low Interest Rates:
You must also take into consideration while taking the business loan for your SME the interest rate as this may affect the growth of your business and may also turn out to be negative for your business. If your business has not got many turnovers then you must opt for a loan which has got lower interest rate. Also, the loan a businessman can opt for if the turnover is low is a loan against property where the property is kept as collateral and the interest rate is low as 10%. This can also be changed by lending a bank overdraft or a cash credit where the interest rate is at 11-13%. On the other hand when we take into consideration the personal loan the interest rates go as high as up to 24% if you have a low credit score in the market. So, you must check the best interest rates before going to the business loans and opt for the one where the interest rates are low and there is less risk. Lastly, you should take into account the assets which are being used as collateral when you are taking the business loan for your business purposes.
- Low Cash Outflow:
Yes! The cash outflow in the business should be kept low initially when the business loan is taken for the expansion or some other purpose. This is a very important aspect to be considered. If your cash outflow is higher than your cash inflow then you must amend it immediately. The only cash flow you can afford at the moment is the payment of the loan and the interest of the loan. Cash outflows include the payment of the salaries, bills, rents, maintenance and dividend and other outflows. For overcoming this problem the best option that can be adapted is by borrowing the loan from your friends and family at low-interest rates which can be very much beneficial for you and you can maintain the cash flow. The minimum cash outflow can also be possible by taking advantage of the bank overdraft service since only the interest needs to be paid regularly and that too on the amount used. A personal loan, on the other hand, would result in huge cash outflow which is not advisable for the business.
- Low Processing Fees:
The processing fee is taken in the initial moment when the loan is sanctioned by the bank. Ideally, this thing should be kept low as it results in benefit for us. Personal loan charges 2% initial processing fees and other loans also charge in the range of 1-3% as the initial processing fee. There may be additional charges too as the bank charges other fees too.
- Collateral Requirement:
Collateral is an asset which is kept against the loan. Every loan demands collateral against the loan except for the personal loans and the loan from the local lenders. The loans need to be backed by the security which should not be kept at risk. If any contingency happens and you are unable to pay back the loan then this becomes a point of concern for you as the assets would be confiscated by the banks. For the risk level to be kept minimum one can opt for gold loans. Gold loans are available at low interest and can be repaid easily without the fear of the loss of the asset. The second best option can be the overdraft facility provided by the bank followed by the bank. Lastly, the requirement should be given proper importance for the loan as the asset is at risk.
- Future Payment Ratios:
You must always take this thing as a priority that whenever you’re taking a loan for any purpose the ratio of your EMI to your income should not be more than 25% which is normal. This gives you an edge over the banks over the payment ratios. The payment should be kept properly and without any delay as most commercial loan lenders agree to some certain key ratios while the payment of the loan such as current ratio, a debt-equity ratio which results in the certain defined limits. This is kept so that during the time of any contingency if your payment falls below the agreed ratio that can affect your credit ability in the market and mark you in the default risks. Moreover, you should keep it at a bit lower side to maintain the timely payments and to maintain your credit in the market.
There are also multiple other factors while you are sanctioning a loan as a representative of the SME should take into account. If any of the employers you are working with has a bad reputation in the market then the sanction of your business loan becomes tough and you might be charged with additional interest i.e. interest higher than the normal one or you might be only provided with only 65-70% amount of the loan as compared to a person who has got a good reputation in the market. Also, you must check that you don’t have any criminal background at the time of applying for the loan as this results in a negative impression for your SME and directly results in the cancellation of the proposal. Lastly, when you apply for an SME business loan you should have a stable business of at least 5 years in which the records should be showing the growth of the business in the previous 5 years.
We at Finance Buddha, help you to avail the best business loans for your SME without any much hassle. You just need to upload the necessary documents and you can get the loan sanctioned.