If you are running a Small and Medium Enterprises (SME's) business, you would need funds to be injected at regular intervals to expand and sustain its success.
Apart from a detailed business plan, and enough capital, you would also look for financing at very attractive terms.In case you select debt-financing, there are no ‘one-size-fits-all’ loan.
It is crucial to pick the right loan for your business.There are a few aspects to look at while selecting the SME Business Loan as per your requirement:
Lenders review creditworthiness of the borrower. Hence your credit score is a critical parameter in determining the rate of interest for the loan. The favourability of the terms of your loan is directly proportional to your credit score. The better your credit score, the more favourable the terms of the loan
For efficient utilization of the SME Working Capital Loan, your knowledge of the business is critical.
A few questions you can ask yourself are as under:
• What is my business and what is its purpose?
• What is the progress in the business so far?
• What is the current status of the business in terms of turnover, profitability, etc.?
• Do I really require additional funds?
• Where should I utilize any additional funds?
• Am I willing to bring on additional investors, or is debt the way to go?
Finding the answers to the above questions would help you get clarity about your business, which in turn, would enable you to make the right decision for a loan to suit your requirements.
Purpose of the loan and amount of loan required are important aspects to be determined. Is the loan for purposes of expansion, a new product line, or day-to-day requirements? You should have a calculated plan or projections to select the most fitting one.
Different types of SME Business Loans are offered by lenders based on business requirements, such as working capital loans, revolving credit, term loans, and equipment financing, among others.
SME Loans can be either secured or unsecured. A collateral-backed loan offers a more favorable rate of interest.
This is because in case of a potential default, the lender has the right to recover the loan amount through either acquisition or selling the secured asset. You should structure your loan in a secure manner, if your business can afford to offer an asset as collateral.
How soon do you need the loan? Some organizations may offer you a better rate, but the timeline could possibly be unfavourable. In this case, calculating the opportunity cost of taking up the more expensive loan should be computed so as to get the required funds quickly.
However, if the interest rate is more important, then waiting for a few weeks is preferred. It is better to revise your projections according to the time of infusion of funds.
Repayment of interest and capital is one of the key factors in selecting the most suitable loan. While SME Loans can generally be customized, complete modification of the entire loan structure is not possible. Hence, understand the broad form of the loan and then decide accordingly.
The lender's reputation, track record, flexibility, and organizational structure are all factors that help ensure you can efficiently utilize your funds.
Also, additional factors should be considered while obtaining a business loan, such as the customer service, the disbursal method, and the flexibility of utilization.
In conclusion, for availing a SME business loan, a detailed study of various aspects is necessary so that you can obtain a loan which matches your requirements and which can be obtained at favourable terms.