To run a successful business, you need a great idea, a detailed business plan, a drive to succeed, and enough capital. If you have the first three, it does not necessarily have to be very hard to find the fourth.
Since March 2020, when the pandemic hit India badly, Small and Medium Enterprises (SME's) have been heavily impacted. Services and manufacturing were interrupted, resulting in defaults and failures. However, after the first lockdown, entrepreneurs learned to adapt and started tailoring businesses to function during these unpredictable times.
To get back on track after the pandemic, the requirement for SME Loans has substantially increased. To effectively restart your business or start a new one altogether, financing is essential.
You can fund your business through two broad routes-equity, debt, or a combination of the two. Injection of capital in exchange for a stake in the organization is referred to as equity investment. This route can involve the infusion of cash into the business by either existing or new shareholders. Consequently, the shareholding pattern of the enterprise changes.
The other option for financing your business is through debt. While this is an added outside liability for the business, it allows you to maintain the existing ownership structure. For SMEs, SME Loans are a viable option. However, these loans are not one-size-fits-all. It is crucial to pick the right loan for your organization.
There are a few factors to consider while picking the best Small Business Loan for you:
While taking a business loan for SMEs, lenders look at the creditworthiness of the people in charge. Your credit score is a vital factor in determining the rate of interest for the loan. The better your credit score, the more favorable the terms of your loan will be.
2. Your business
For efficient utilization of the loan, you need to know the business and its requirements. To get a better understanding, here are a few preliminary questions you can ask yourself:
- 1. What exactly does my business do?
- 2. What is our progression so far?
- 3. What is our current position?
- 4. Do I really require additional funds?
- 5. Where should I utilize any additional funds?
- 6. Am I willing to bring on additional investors, or is debt the way to go?
Getting the answer to these questions gives you a clearer understanding of your business position, which in turn helps you make the right decision for a loan to suit your requirements.
3. Business Plan
What exactly do I require the loan for? How much do we need? Is it for purposes of expansion, a new product line, or day-to-day requirements? These are some of the questions you should have an answer to before opting for a loan. Obtaining funding aimlessly without having a calculated plan or projections will not allow you to select the most fitting one. Lending organizations offer loans based on business requirements, such as working capital loans, revolving credit, term loans, and equipment financing, among others.
SME Loans can be either secured or unsecured. A loan backed by some collateral offers a more favorable rate of interest. In case of a potential default, the lender has the right to recover the loan amount through either acquisition or selling the secured asset. If your SME can afford to offer an asset as collateral, it is advised to structure your loan in a secure manner. Keep in mind the drawbacks of doing this involves that you may potentially lose ownership rights of an asset that may be a valuable addition to your business. If this is a risk you are willing to take, a Secured Business Loan is the most suitable option for your enterprise.
5. The Timeline
How soon do you need the loan? Some organizations may offer you a better rate, but the timeline could possibly be unfavorable. In this case, you have to calculate the opportunity cost of taking up the more expensive loan so as to get the required funds quicker. However, if the interest rate is more important, then waiting for a few weeks is preferred. It is important to revise your projections according to the time of infusion of funds.
Repayment of interest and capital is perhaps one of the key factors in selecting the most suitable loan. While SME Loans can generally be customized, complete modification of the entire loan structure is not possible. Hence, understand the broad form of the loan and then make a decision accordingly.
7. The Lender
Finding funding is easy, but pairing up with the best lender for taking on debt is a crucial step. Banks, NBFCs, unorganized lenders are a few types of lenders that can offer a loan catered to your requirements and your vision of the business. The lender's reputation, track record, flexibility, and organizational structure are all factors that help ensure you can efficiently utilize your funds.
Keep in mind that there are additional factors to consider while obtaining a business loan, such as the customer service offered, the disbursal method, and the flexibility of utilization. Speaking to an agent who can walk you through the process and structure will give you clarity on your next steps. Here at Shriram Finance Limited, we understand the unique requirements of every business and will guide you throughout, starting from the initial stage of calculating your eligibility. The Shriram Finance Business Loan Eligibility process assesses your business using seven parameters: financial strength, business performance, human resources, technology acquisition, adoption, certification, and market presence.