If you are seeking a working capital loan, you’ll need to consider several parameters. Given the wide range of credit types available in the market and various products designed explicitly to cater to the short-term requirements, expansion projects, or small businesses, making a right choice could be overwhelming.
Additionally, the market is crowded with different types of lenders, too. You can secure a business loan from online lenders, high-street banks, challenger banks, and small local experts.
With the emergence of different loan products and providers, the qualifying norms, credit interest rates, fees, besides other expenses can fluctuate significantly. Let us have a closer look at some viable lending options and criteria that could help small companies overcome common financial challenges.
SMB and Enterprise Loan Types
SME loan in India can be customized to suit both long-term and short-term requirements. For long-term plans, financial support such as business expansion can be made available. On the contrary, small-scale projects can get assistance for working capital needs.
Factors you need to consider before applying for a business loan.
While applying for an unsecured loan in India, you need to pay due attention to the application process. Firstly, as an entrepreneur, you must understand the purpose of applying for a loan, i.e., why you need credit and where it will be used. It helps you minutely narrow down the amount of investment required to achieve the target. If the goal is not defined beforehand, either the amount of the loan could be lower than what was needed or vice-versa. And, in both cases, the objective remains unmet.
Once it comes to repayment, it is always essential to understand credit costs. It may comprise of interest rates, processing charges, reporting fees, and all other expenses. Charges, along with the amount of time taken for a loan disbursal, are crucial components to study while you are considering working capital loan.
The most relevant factor in terms of loan repayment is the borrower’s credit score and history. One can get the most favourable conditions on their Unsecured business loan if their credit score is more than 750, which would help them pay back quickly. Therefore, retaining a decent credit score is always advisable.
Collateral is another critical thing to consider while trying to avail a loan for small business. Since most banks require the lender to fund the business loan, it is essential to fix the collateral in advance. The guarantee could be a property, a piece of machinery, or even some future return. Therefore, it should be appropriately considered what the would-be right deposit to lend against the credit because if the loan is not repaid, there is a reasonably good chance that you could lose it forever. Some of the online lending and NBFC do not require the borrower to pledge anything in return for the loan amount. So, in case you do not have collateral, you can still get an unsecured loan with these two options.
Impact of digitization on loan processing
One often looks for minimal documentation and low processing time while applying for a business loan in India. These are the two factors that make the loan application process seamless and hassle-free.
In fact, applying for loans has become uncomplicated with the advent of digitization. The credit could be disbursed within hours of application with minimal effort from the borrower while applying for online lending.
Additionally, borrowers could also compare various loan options and choose the one that works best for their requirements.
Essential Factors That Indian Banks Consider Before Sanctioning Loans
Just like the loan seekers, banks too evaluate all the necessary details about the borrower before lending. Some of the variables they consider include:
- Business potential: Banks need to be sure that they will be repaid for the loan they sanction. So, to assess how much credit should be granted, they run through the company’s revenue.
- Loan purpose: Banks would like to know the purpose of availing the loan for retailers and where it is going to be utilized by the borrowing party.
- Collateral: In the wake of business failure, the banks would need some guarantee through which they can get their invested funds back. So, they require the loan-seeker to pledge something as security; it could be in the form of a property, a piece of equipment, or a future revenue that can be used to reimburse the amount if the borrower fails to repay in time.
- Credit score: Because the business loan from the bank falls in the category of secured loan, lenders can use the collateral if the loan is reimbursed. Nevertheless, they test the borrower’s credit score to get the best repayment terms on loan. If you have a higher credit score, the better term a loan seeker will get for repayment.
- Personal investment: If the borrower has got his/her stake in the business, banks will feel more comfortable in lending to such a party. It demonstrates the owner’s willingness to risk something in case the company fails.
If the bank denies a loan for small business, there are several other alternatives that you could try, such as NBFC and unsecured loan options from online lending firms. Not only the documentation process is less clumsy, but the loan processing time is also way much faster than that of the banks.