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08 Aug

5 Things That All Small Business Owners Should Consider Before Taking A Loan

  • By Editorial Team
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Introduction

Small business owners (SBO) have seen a rise in capital assistance, not only in the form of subsidized bank loans but also from other financial institutions that offer flexible financial options as well. This may be attributed to the fact that the Indian economy is poised to be valued at $6 trillion by 2030 and the MSME sector is likely to play an important part in this growth. 

However, all these situations boil to one factor and that is money. Getting a loan is a critical process that involves financial capital and should be handled with care. Therefore, before you get on the loan bandwagon, here are some factors that you should consider, especially if you are a small business owner. 

Things to Consider Before Taking a Loan

  1. Identify a Clear Objective for Business Loan Application: 

When outlining a proposal for a business loan, businesses should be aware of the implications that follow the process. In order to get your loan sanctioned, be clear about the following:

  • The amount of money that you need for your business. 

  • A proper capital funnel about where and how your business will use that money. 

  • How you will repay the loan?

  • How your business is worthy of getting this loan without capital risk?

  • What are your plans of paying back the loan if your business does not take off? 

Small business loans are ideal if you are looking to improve your existing inventory or are planning to expand your service portfolio.

  1. Draft a Comprehensive Business Plan: 

Creating a compelling business plan takes you a long way in the loan process. Here are some key things that you should keep in mind while drafting a business plan for your lenders.

  • A well-defined cash flow is the most important thing that you can show to your lender in order to get the nod for the deal. The proposition of a strong and well-documented cash flow will convince your lender of your credibility and your ability to pay back the loan in real-time.

  • Robust marketing plans and strategies, with respect to today’s scenario, will help you get the lender’s approval more easily. 

  • Management’s credibility and track record also plays a poignant role in creating an impression upon the lender and getting that much-needed loan.

  1. Demand for the Right Amount: 

This is simple to understand yet difficult to implement. Demanding the right loan amount is crucial for you to get that loan and in order to understand the right amount; you need to ponder upon the following steps before applying for a loan.

  • Understand your business relevance.

  • Is your business an in-demand venture?

  • What is the future of your sector?

  • The competition in your sector and are there any major players for you to tackle?

  • What is your 5-year plan and what is the infrastructure that you are looking at which would need financial investment?

  • Are you looking to invest in R&D?

These steps will not only help you outlay your business plan but also assist you in determining the exact amount of capital that you will need to set up your enterprise.

  1. Research on the Lenders: 

While they are helping you out in financial duress, as business owners, it is important to undertake appropriate research on your lenders to know if you are partnering with the right lender and securing the right deal. You can look into the following to gauge their validity:

  • Their presence in the industry and the industries they have catered.

  • Their experience in catering to your sector.

  • Their repayment model and average APR (Annual Percentage Rate) of the existing outstanding small business loans. 

  • The amount of time taken for complete processing.

  • Their credit and financial affiliations. 

  1. Choose a Loan Tenor: 

Depending upon your expansion plans or financial footprint, choosing the right loan tenor is important for your business. As business owners, consider the following factors while choosing the right tenor:

  • Your approximate lead conversion ratio.

  • Market growth and your ability to leverage it to grow your business. 

  • Any future investments such as R&D, skill upgrade, service expansion, and so on.

  • Your predicted (and practical) ROI.

Conclusion

It is important that you do not undermine the discussed factors when applying for a loan process, as they will bring you one-step closer to successfully getting that business loan. You can even approach credible lenders and seek professional advice before taking the loan and jumpstart your business successfully. 

Good Luck!

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Did You Know

Credit Rating

Credit Rating is the process of assessing the credit-worthiness of an individual, company, business, or government and the probability of their defaulting. It is based on the past loan-related transactions of the borrower. A high credit rating means that the borrower is likely to make timely repayments, and a low rating means that he or she might default.

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