With the booming economy and efforts by the govt. to make it easier for companies and industries to obtain loans to create jobs and further boost the economy, the current market conditions are such that it has become much easier to obtain loans and investments. The focus on empowering the youth to create their own avenues of employment through entrepreneurship has seen more and more people opting to start their own businesses and companies all of which is an indication of the growing affinity of the country towards taking risks and managing their own business rather than just going for traditional forms of employment in form of jobs. While it has become that much easier to obtain a business loan, there are still certain points that one must keep in mind when opting for a business loan:
- What you need
When applying for a business loan it can be very tempting to borrow as much money as possible as the more you have the more you can do may seem like an attractive line of reasoning but has some critical flaws. Higher amounts have higher interest rates and without an adequate income to debt ration you’d only be hurting the credit score of your company and the high interests may diminish your profits in the early stages of the business and may become more detrimental then beneficial for your business. It is thus advised to correctly estimate a rough amount of what you need.
Banks need hard assets to be pledged against the loan so that the bank can reduce its risk of creating a bad loan. Be it a start-up or a small business or industry, banks require collateral to be provided in order to complete its regulations and the evaluation of the hard assets provided as collateral are what decide the final loan amount that is offered. When applying for a business loan, one must ensure that he/she has the collateral to back up the loan.
Another key aspect that the banks take into consideration when approving a loan is the ability of the borrower to repay the loan. The applicant is required to provide financial details of the past years. The applicant’s income is the key to decide the interest rate and the period of the loan that would be allowed to the borrower.
- Weigh your options
Going to the banks for a business loan may not always be the wisest of choices, given how one requires offering collateral and his/her credit score and financial details can affect the approved amount which can be significantly lower than what one needs. Going around and looking into various co-operative societies or other venues for a loan without the strict conditions of the banks. One may also be able get lower interest rates if one has time in hand to look for the best possible lender.
- Hidden penalties and costs
One has to be wary of the fine print and the way the words in the loan agreement are structured. There may be prepayment penalties and some banks may have harsher penalties than others. Other banks may have lower interest rates but extra hidden charges that inflate the interest amount to a much higher number. Before putting in an application for a business loan one must go through all the related documents and clear out any suspicious or dubious clauses that may seem like extra charges or unreasonable charges that can be avoided.
Keeping these 5 points in mind when opting for a business loan can help in significantly bringing down interests or saving one from paying more than what one ideally should.