What you need to consider before taking SME Business Loan

SME business loan is a key enabler of growth for Small and Medium Enterprises (SMEs). The loan caters to SME’s varied business requirements, frontally. Material sourcing, equipment upgrade, marketing, business expansion and product development, you name it.

However, SME loan is an obligation for the borrower. He/she has to approach the loan with some caution and forethought. Here’re a few factors to be factored in before applying.

Determine your needs:

Determining the exact amount you need is the first critical step towards smart loaning. To this end, you need to evaluate your requirements carefully. Make a list of areas that need urgent investment and skip the non-urgent ones outright. Avoid asking for hefty SME loans for two reasons. One, the lender may reject your application. Two, higher loans incur higher interest rates. Given the resource crunch, you might find it hard to repay the loan on time.

If evaluating is not your cup of tea, feel free to rope in financial experts. Armed with experiential insights, these professionals will help you arrive on educated decisions.     

Create a business plan:

SME loans are a high-risk proposition for lenders. So, they prefer not to lend to someone who’s yet to figure out ways to utilize the funds. That calls for creating a business plan before you apply. A business plan assures them of your business growth and timely repayments.  

The business plan should be elaborate, sharp, well-illustrated and backed by relevant facts and figures. It must feature the opportunities you wish to tap in with the funds. Plus, don’t forget to highlight your company’s assets, workforce and everything else that boosts your credibility.   

Decide on the type of loan:

SME financing comes in all shapes and sizes to spoil you for choices. Some loans require you pledging an asset while some don’t. There’s a disparity in repayments as well, as some loans involve EMIs and others offer multiple options to repay. The tenors also vary from one loan type to the other. Likewise, some extend you the cash credit facility while some prefer not to.

It’s in your best interest to compare all loan types and opt for the best one. Also, don’t lose sight of your underlying loaning objectives, fund requirements and repayment capacity.

Consider your credit history:

Credit history reflects how trustworthy and responsible a borrower you are. Here, ‘you’ refers to your organization, as individual credit history is largely insignificant in the case of SME business loan. If your company has maintained financial hygiene, expect faster and hassle-free loans. If not, outright denials or heavy interest and strict repayment schedules might be on the cards.

To rectify faulty credit history, you need to repay all your existing liabilities as early as possible. Plus, spending judiciously and interfacing with credit rating agencies might help.    

Choose the lender:

Your loaning experience depends on the lender you prefer. It makes sense to research the market and choose wisely. Shortlist a few established lenders and compare their interest rates, repayment schedules, penalties and processing fees, approval and disbursal times, eligibility requirements and other factors. That’ll help you get the better end of the deal.

You can prefer NBFCs over banks. That’s because, NBFCs are more responsive towards your unique SME financing requirements, offering better interest rates, tenors and terms.

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Prerna Arora