Questions To Ask Before Taking A Business Loan
You wish to expand your business. But financial constraints act as a roadblock in your ambition for growth. Perhaps, your business has not earned enough profit yet. Maybe it is a start-up, and you do not have enough working capital. So, what can you do?
You can avail a Business Loan and get the much-needed boost to your business, enhancing your competitiveness and profitability.
When should you take a business loan?
You can take business loans for a variety of reasons. Use it to launch a product line or fund advertising. Buy inventory or upgrade your equipment. Smaller businesses do not always have the working capital to fund all this on their own. Business loans can help during such times.
Why take a business loan and not a personal loan?
It is true that personal loans are easy to get. But a personal loan may not be big enough to fund your business. The interest rates are also on a higher side. A business loan can provide you with the adequate loan amount. And you can avail the funds at competitive interest rates. Furthermore, business loans can limit your personal liability in case of default.
Also Read : Advantages Of Availing A Business Loan
What is the average business loan interest rate?
Business loans have an average interest rate of 11–28%. It all depends on the lender and your creditworthiness.
What questions should you ask before you take a business loan?
A business loan seems like an easy option for financing your business. But before you rush to take one, here are four questions you must ask yourself:
Is a business loan the right option for me?
Business loans can be a worthwhile option, especially for small and medium-sized businesses. Here are some situations where a business loan is a right choice:
- Your business has strong cash flows coming in phases. You can take a business loan to avoid a cash crunch in the lean times.
- Your business has a definite return on investment. This return can help you cover the debt repayments.
- Your business finances are getting spread too thin. A business loan can function as a cash buffer. You can allocate funds without hesitation or compromise.
- You need a loan for a specific purpose. For example, you run a diagnostic clinic and need to buy medical equipment. Or, you run a delivery service and need new vehicles. Get a tailored business loan to meet your needs.
How much do I need?
You may be eligible for a high-value loan. But do you need to borrow such a big amount? Work out your budget first. Figure out why you need the loan and how you wish to spend it. Do not take on excess debt. Some number crunching will help you figure out how much debt you can afford. Factor in your current income and probable future income. See if the repayment schedule is manageable.
Is taking a business loan worth the debt?
Do you expect your business to generate returns that exceed the debt? Also, can you earn future returns through the use of this loan? If you answered ‘Yes’ to both questions, then the loan is worth it. But, to figure this out, you need to do the math. Sit down with your financial advisor to assess the true cost of your loan. Factor in all the expenses and liabilities. Take into consideration the worst case scenario and then decide on the loan amount.
What kind of lender should I approach?
Three types of lenders offer business loans:
- Banks and non-banking financial companies (NBFCs): They offer competitive business loans with a low interest rate. But you need to check the eligibility criteria. Some lenders will lend only if your business has been operational for a few years. Others will lend to only some kinds of business. Most lenders will insist on a good company credit report. So, know the requirements before you apply.
- Alternative Lenders: These are smaller lenders who offer business loans. Getting business loans from them is easier. But their interest rates and charges tend to be higher than those of banks and NBFCs. You can find these alternative lenders online. They provide an alternative lending platform where they connect borrowers and lenders.
- Speciality Finance: This refers to financing activities that occur outside the traditional banking system. Speciality finance companies offer business loans for niche products. For instance, you could get loans to buy equipment. Here too, the rates may be higher than those of banks and NBFCs.
What questions should you ask the lender?
Knowing which loan is the right fit for you is important. So, list out your queries for the lender as well. Here are six questions to ask your lender before taking a business loan:
- How much are the processing fees?
- Does the loan have a prepayment penalty?
- How much collateral is necessary? Is collateral required at all?
- What is the minimum credit score for getting business loan approval?
- Are there any foreclosure charges?
- How soon can I expect loan sanction?
Now, you know what questions you should ask before applying for a business loan. Research different lenders and do the calculations before you take the plunge.