Things to watch out for when getting a business loan for a start-up
Are you an entrepreneur planning to apply for a business loan to pump crucial funds into your start-up? Here’s a handy checklist before you get started.
So you have your business plan in place and are ready to jumpstart your start-up. The only thing between you and your start-up dream is that business loan. But, hold on, do you have all your research in place? Considering some of these basic pointers will surely help you before you initiate the proceedings.
Plan how much you need and when
Getting a small business loan requires some amount of planning from your end. The first step before borrowing is identifying how much you need and when. It would not be prudent to ask for more money than you need. It might seem favourable to have a big amount for your start-up, but if you only need a small amount it’s not necessary to pay interest on the money that is not required, or maybe required at a later stage. Starting small is always the sensible thing to do.
Rather than going all out, determine how much you need to get through the first few months of business and use that as a starting point. Once you prove that your business is viable, you will be in a good position to borrow more money if necessary. Also be sure to communicate with your lender from time to time and let them know how your business is progressing. Knowing about your successes and even your failures will build a bond of trust and ultimately add to your company’s goodwill. In case of setbacks, you can show your investors and lenders what steps you will undertake to avoid similar mistakes in the future. This will certainly pave the way for cheaper and faster loans in the future.
Does my loan have a prepayment penalty?
It’s easy to overlook the fine print when going through all the paperwork in the loan application process. An important question to ask is whether or not your lender has a prepayment penalty? It’s common practice amongst some financial institutions to impose a penalty fee in case you decide to pay up the business term loan before the term is done. Whether it’s a start-up or a fast-expanding business, if you foresee rapid growth in the near future, there may be a possibility of repaying the business loan in advance. Some institutions would impose a penalty only if the loan has been paid off in a very short period of time. Hence, it’s wise to have clarity on this beforehand.
If your requirement is of a small amount for a short duration, you could explore the possibility of borrowing from family and friends. Else, the aim should be to borrow as low as possible. Loan against collaterals are usually cheaper and faster. Types of collaterals include cash savings or deposits, equipment, inventory, property and hard assets such as gold.
Do keep in mind, whenever borrowing money from any source, be it even family or friends, that this is a business transaction and treat it as such. The agreement should include your business plan, how the funds will be used, repayment terms and pre-payment terms. If you are getting into an investment arrangement where the financer will be taking a stake in the company, it is equally important to outline the agreement beforehand to protect yourself, your family and your business.
Explore your loan options with Bajaj Finserv, which offers different kinds of loans to suit all needs.