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5 Things To Ask Yourself Before You Get A Business Loan

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Feb 01, 2021
5 Things To Ask Yourself Before You Get A Business Loan

It is impractical to think that you can do a business without sufficient capital. Whether your organization is big or small, capital is the essence to run your business. Arranging capital is the groundwork for a successful business. You can kick start a venture with an easy business loan. A steady cash flow propels the business to greater heights and creates a scope of expansion. You can achieve this only when you apply for a term business loan. However, before applying for a long-term or a short-term business loan, there are few things that you need to ask yourself. You would need to carefully consider a few aspects before you reach out for financial help.

Am I Eligible for a Business Loan?

Even before you think about applying for a business loan, you need to assess your credibility and eligibility. You would have to fulfill the following eligibility criteria to apply for a business loan.

  • Age – The candidate should be over 21 years but below 55 years to qualify for applying for a business loan.
  • Credit score – A credit score speaks volumes about your firm’s financial health. If credit bureaus with Reserve Bank of India (RBI) licenses have issued a credit score of 750 or more, you are eligible for applying for a loan.
  • Income Tax Returns – Your business should have filed a minimum of 1-year income tax returns to become entitled to a loan application.
  • Business History – The company should be at least one year old to make you worthy of a business loan application.
  • Documentation – The candidate should support the loan application with identity proof, business ownership proof, bank statements, a copy of ITR, and more.

What Should be the Amount of Business Loan? 

The purpose of applying for a term loan is to meet your business requirements. When you have excess funds, you may fail to utilize them appropriately. On the other hand, insufficient funds will not justify the intention of taking a loan. Thus, before approaching your lender, you need to make careful calculations to estimate your requirements. Your estimation should comprehend the cash-flow need for the next three years. It is always sensible to add 10% to 20% over and above the firm’s financial need because you need to stay prepared for unanticipated expenses.

What Types of Term Loan Options Should I Explore?

There are a plethora of term loans to meet the various sizes of organizations. You would need to explore your loan options depending on the nature of your business. A term loan is the most common mode of financing for small business establishments. It is a fixed amount disbursed by the lender for a fixed repayment schedule. The borrower has an option to choose between a floating or fixed interest rate. Term loans are of three types.

  • A short-term business loan – Lenders offer this type of loan for 18 months.
  • An intermediate-term loan – The repayment schedule stretches up to three years.
  • A long term loan – It runs between three to twenty-five years.

Who Should I Choose As My Lender?

Choosing your lender is an act of prudence. It would be best to approach a known lender who is familiar with your credit score and history. However, before finalizing a lender, you should take the following points under consideration.

  • Compare interest rate 
  • Reliability
  • Flexibility
  • Authorized or government-approved

What Would be My Repayment Strategy?

Your loan requirement should also be based on the repayment scheme and assessment of whether the loan amount puts a dent into your business or reaps profit. You should not plunge into taking business loans beyond your means. Scrutinize your debt-to-revenue ratio to decide your repayment scheme. Your gross monthly income should accommodate the monthly payment of debt while maintaining a healthy profit. 

Conclusion

While a business loan is crucial for survival, it is also important to assess diverse elements that give a boost to your business without burdening you financially.

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