The wheels on the global economic engine run on sound principles of capitalism. Entrepreneurship and businesses form the central aspect in the progress of humanity. The convenience and lifestyle of the future generations depend on the levels of development we make in the important parameters of production, marketing, per capita income, and most importantly the financial health of the business organizations. Gone are the days when business credit was limited to a select few in society.
During the olden times, the credit structure was confined to the top classes of the society. As the society progressed and with the introduction of egalitarian ideas, there came a new wave of businessmen and enterprising professionals who were intellectually geared to start their own business. Banks and other financial institutions are realizing the importance of credit facilities to this new class of small businesses for their own profitability sake.
Digital lending platforms for Business Loan
Many businesspeople are left out of the credit spectrum due to the convoluted financial policies of traditional loan providers. The traditional loan model consists of risk assessment, underwriting, and complex approval process and finally fund disbursal. Digital loan providers make sure that the whole process is well streamlined and there are fewer requirements for documentation leading to instant approval of the loan.
Digital lenders satisfy the need for business loan of entrepreneurs in a swift and obstacle -free way. In the present financial world, there are a lot of digital lenders entering the market. Customers should exercise due caution and follow the principle of ‘buyers beware’ before selecting the right digital lending player.
Importance of a business loan
The computer revolution of the 1980s saw the emergence of giants like Steve jobs and Bill Gates. The dotcom revolution led to a complete metamorphosis of how global businesses operate on a single platform known as the internet. In the age of digital marketing everything is possible if you get a business loan.
In the previous decade, business owners had to depend a lot on financial institutions for business loans. The success in the business was contingent upon a high quantum of business loan granted by the banks to the borrowers. The simple logic was that the higher the loan the more you can withstand losses and can turn a profit over time. In the age of the digital revolution, to achieve success in business one has to have a judicious mix of individual skills and timely credit fulfilment to launch the business into the trajectory of success.
Who needs a business loan?
Business growth is contingent upon the right income flows. To generate money one has to spend money in the business cycle. After all, it is a competitive market and various expenses related to growth, infrastructure, digital marketing campaigns and real-estate do not come free or cheap and business loans are taken by entrepreneurs to get the ball rolling.
- Entrepreneurs can increase the capital flows in their fledgling business by getting a business loan. A business loan is an ideal source to infuse capital in your business concern to ensure efficiency and business sustainability.
- The supply chain systems of a business have to work properly and business loans help to expand the infrastructure and augment the quality of human resources so that the business can build a loyal customer base and brand reputation.
- Entrepreneurs who are looking to expand their businesses into new geographical markets and launch new product ranges can take advantage of a business loan. The prevalence of digital lending mechanisms such as online smartphone loan apps have increased the threshold of eligibility.
Interest rates on Business Loans as of March 2021:
|Name of the Lender
|Rate of Interest
|Amount of the Loan
|Tenure of Repayment
|Kotak Mahindra Bank
What is the ideal time to get a business loan?
In the modern age of cut-throat competition, individuals with rare business insights can make it big in the market by understanding the logistics, supply chain systems and various cost models of the business.
Financial entrepreneurs have introduced state-of-the-art online loan apps which use AI and machine learning algorithms to analyse the credit history of the individual applicants and grant them business loans to meet their credit requirements. Business loans can be availed in any one of the following situations:
- To enhance the strength of the business plan and reinforce crucial supply chain arrangements among vendors and manufacturers.
- To ensure minimum fluctuations in money flows and enhance the capital returns on the business.
- Running a business is a complex proposition in the global business arena. Growth is the only weapon that will ensure long term sustainability. Digital marketing has evolved into a niched process where continuous investments are needed in hiring the top digital marketers and SEO specialist along with maintaining apex website design.
Business loans are the ideal financial sources to reinforce your finances. The profitability and sustainability depend on the quantum of investment through business loans. Let’s go through some of the reasons why businesses why enterprises need to get a business loan:
The geographical markets of the global economy have come under a unified umbrella thanks to the accumulation of retail websites on the Internet. Every small business starts with a dream of becoming a captain in the particular industry. If you are not part of the online retail ecosystem, then it is as good as closing the shutters of the business.
Expansion into the digital marketing arena by setting up of online shops is crucial for maintaining business sustainability. Business growth is dependent on many causes such as:
- Recruiting specialised staff to deal with crucial departments
- Updating the building infrastructure
- Acquisition of new properties
- Conducting advertisement campaigns in both online and offline media
Business loans can help borrowers to meet the expenses of enhancing the footprint of their business without depleting the pivotal operational funds that are required for day to day activities. Business loans help enterprises to mount a double pronged strategy where on one side the businesses continue to offer consistent products of good quality to the existing customer base and at the same time strives to expand the customer and product profile so as to attract new customers.
This aspect of the business is quite challenging to manage as a lot of overhead expenses are involved. The core problem lies in the fact that business owners need cash to invest in product design and they are taking a gamble that the customers will be endeared to the product and which results in profitability.
Once the businesses enter the operating side there will be a need for continuous cash injection in business expansion and in inventory replacement to meet the demands of an educated and hyper aware customer base in the digital age.
Businesses that depend on seasonal inventory have their problems compounded because of the supply fluctuations in the global markets. By availing a business loan, entrepreneurs can minimise their inventory cost and stay in tune with the latest trends and offer cutting-edge solutions to customers.
3. Cash flow
Cash flow can be intimidating to new business owners. The cash flows from business are important to clear off existing loans and also invest in your inventory. The inventory problems are compounded due to inadequate cash flows that may result from either unsold inventory or due to pending bills. Vendor management is a complicated process, and its efficiency depends on the optimal servicing and honouring of bill payments from both the demand and supply side of the business.
A short-term business loan acts as a financial saviour to entrepreneurs and helps them in meeting their regular operational costs. Business loans ensure that companies never run out of cash which enhances the quality factor of the products that are offered to the customers. Customers impressed by the continual excellence of the business organisation are more likely to spread good words among their friends and relatives which drives up the revenue and covers for other unexpected losses.
Any breakage of supply chains due to malfunctioning equipment and physical infrastructure will lead to loss of brand reputation and the business will never make a comeback in this era of hyper competition.
- It is necessary for every business to have good functioning equipment such as manufacturing machinery, computer software and transport systems to maintain a clean supply chain from production to sales.
- Some businesses may face wear and tear of the machinery which results in depreciation. Companies need to look for more efficient suppliers of machinery from the developed world.
- Faulty equipment can make the business owners liable for any perceived losses to the customers who depend on your service.
- Small loans help in the optimal cost management of your manufacturing equipment and help you to deliver amazing customer experience.
- Business loans help the companies to update their technological infrastructure in tune with the latest trends and attract more tech savvy customers.
- Research has indicated that investment of money in business software leads to a good interaction of customers with the website front on 24 by 7 basis.
- The purchase of the latest data analytics software can be done using a small business loan which helps the company’s finance professionals to predict demand and to target new customers.
5. To target a higher quantum of loan in the future
As the years go by, every company to business wants to reach the top position in the market. For this, business expansion and use of the latest equipment should be done during the product development. Business loans are the crucial links that determine a business long-term growth and profitability based on the opportune investments.
Taking out small business loans help to build a reputable credit history of the individual and the company. If you wish to take your business to the next level in the coming years, availing small business loans and repaying them at regular intervals will enhance your financial standing in the eyes of the centralised credit rating agencies on a global level such as Finch and Equifax.
When the loan providers observe your repayment of a small loan in a quick and convenient way, they will regard you as a prime customer and you will be their first choice of preference when applying for a big-ticket loans.
Benefits of a business loan:
Business loans provide timely credit to manage the infrastructure needs, employee salaries and inventory cost of the business organisation. The following are some of the top benefits that can be derived by availing a business loan:
- High degree of flexibility in using the end funds according to the discretion of the borrower.
- Business loans are highly convenient from the application, sanction to the disbursal stages.
- The interest rates applied on business loans are reasonable and depend on the financial capability of both the company directors and the business organisation.
- Unlike Angel investors, the financial institutions do not make it mandatory for the entrepreneurs or business organisation to share their business profits in lieu of repayment.
- Majority of the business loans are an unsecured form of credit. Entrepreneur need not submit collateral security to avail finance.
1. How is eligibility determined for a business loan?
The business loan eligibility depends primarily on the following factors.
Maintaining of optimal credit score at CIBIL or Equifax
Profit and loss statements for the last two years
Crucial financial parameters such as company director salaries, interest costs of existing financial obligations and depreciation are considered.
2. How is the quantum of the business loan decided by the financial lenders?
The quantum of the loan depends on the capability of the business organisation to meet its financial EMI payments. The maximum amount is calculated under the debt service coverage ratio. Most banks mandate that the debt service coverage ratio should lie in the range of 1 to 1.5. Certain exceptions can be made depending on the type of business.
3. Is there a pre closure facility after availing business loans?
A few banks make it mandatory for the business loan to remain open from 6 months to 1 year. Depending on the original terms and conditions, the banks may also stipulate that the loan can be cleared without increasing any pre-payment penalty charges.
4. Can enhancement of the credit limit of a business loan take place?
Yes, it is definitely possible. However, it depends on the eligibility of the borrower and entirely the discretionary decision of the lender. Business loans can be enhanced subject to increase in the cash flows and profitability of the business organisation.
5. How the interest rate on the business loan is calculated?
The financial institutions calculate the future repayment probability and assign base rates to each category. Business loan borrowers whose credit score is in the excess of 700 will be given very favourable interest rates. If the credit score is in the downwards of 680, then lenders assign a higher interest rate to the business loans due to increased risk portfolio.
6. What is the line of credit facility in sanctioning of business loans?
Line of credit is a revolving credit where the borrower is assigned a specific figure which indicates the maximum limit to which the business organisation can avail funds. Advantage of line of credit is that borrowers need to pay monthly interest only on the partial amount they have borrowed and not on the whole principal amount.
7. What are the significant points of difference between a term loan and a line of credit?
A business term loan is the standard variant of a business loan in which borrowers are required to repay the borrowed month in periodical monthly instalments also known as Equated monthly instalments. A line of credit has an advantage of interest payment only on the utilised amount.
8. What are the multiple options that borrowers can make use of to carry out the repayment obligations in a business loan?
Borrowers can make use of electronic clearing service, post-dated cheques or savings account direct debit to repay the business loan.
9. Can I successfully avail a business loan without the need for collateral?
Business loans can be availed by entrepreneurs without the need for any collateral security due to the guidelines of Government of India in providing cheap accessible credit to move the wheels of the economic engine.
10. Who can successfully get a business loan from banks and financial institutions?
Both professionals and non-professional workers can avail business loans. Any business organisation which has a sound business plan and has a high probability of future profits is more favourably considered for sanction of a business loan. The following are the different customer segments which financial institutions consider for a business loan:
- Partnership firm
- Societies and pathological labs
- Diagnostic centres, nursing homes and hospitals
- Public limited companies which are closely held and sole proprietorships
11. Are business loans given to start-ups?
Start-up entrepreneurs with an impeccable credit history and who have outstanding financial figures for the last financial year of the company with consistent revenues can successfully apply for a business loan. However, there is a good probability that financial lenders will be interested in asking for a collateral security depending on the nature of the business.