If you have been profitably running your business for the last couple of years, you would like to take the next step and expand your business horizons.
However, this decision requires additional funds for new equipment, a bigger workplace, more workforce, inventory, marketing, and other purposes. This is when an SME loan can come to your financial help. It is an unsecured loan that you can use to fund your business-related expenses.
Are you considering applying for a business loan to grow or expand your existing business? Here are a few essential factors to consider.
6 Important Factors To Consider When Applying For A Business Loan
- Purpose of Applying for a Loan
The most important question you must ask yourself is’ why do you want to apply for a loan’? Articulate the purpose of your loan application. Think about your short-term and long-term business needs and apply for a loan accordingly.
For instance, if you need a loan to purchase inventory, you need a small short-term loan to solve your purpose. However, if you want a loan to build working capital, your loan application will have a larger amount. Therefore, assess your business needs while framing your loan application.
- Loan Amount Required
How much loan amount do you need to borrow? You can calculate the loan amount depending on the purpose of your loan application.
You will find many lenders offering generous loan amounts to borrowers. They may provide you with a high loan amount at favourable terms and conditions if you have high credibility.
However, you should not borrow a high loan amount just because you are eligible for it. After all, you will need to repay it along with the interest rate. Therefore, it is crucial to add your expenses and calculate the loan amount sufficient to cover them.
- Interest Rate
The interest rate is the lender’s additional amount to lend you the borrowed amount. When you take a loan, you have to repay it to the lender along with the interest rate. Different lenders may have different interest rates to offer on business loans.
The business loan interest rate applicable to your loan application may differ based on various factors, including your loan amount, repayment tenure, credit score, repayment capacity, etc. Therefore, it makes sense to compare interest rates from different lenders and apply for the best offer.
- Repayment Tenure
Most lenders offer flexible repayment terms on their unsecured business loans, ranging from a few months to several years. Longer loan term means smaller EMI amount but increased interest outgo.
On the other hand, selecting a shorter loan term will increase the EMI amount but save on the total interest cost. The business loan EMI calculator is an excellent tool that gives you an estimate of your EMI amount. It helps you choose your repayment tenure according to your repayment capacity.
- Fees and Charges
When you apply for a loan, you need to pay several other fees and charges that make up your total loan cost. Along with the principal amount and interest rate, you must be ready to pay the origination fee, processing fee, documentation charges, late payment penalties, and other charges.
A reputed lender will inform you about all these fees and charges beforehand so that you can plan your loan application accordingly.
Before signing on the dotted line, don’t forget to read the fine prints on the lender’s website or loan document. Most of these charges are clearly mentioned in these fine prints. However, unfortunately, most prospective borrowers ignore them and receive them as a surprise.
- Your Repayment Capacity
Before approving your loan application, most lenders are concerned about one thing: your repayment capacity. They calculate it based on your debt-to-income ratio, credit utilisation ratio, credit score, and other numbers.
They also check your financial documents to determine if you can pay the EMIs on time or not. Therefore, you must maintain a high credit score and stay consistent with your repayments to gain the trust of your prospective lenders and improve your loan eligibility.
Conclusion
It is common for businesses to seek out business loans to fund their expenses and get out of the rough patches. If you are also looking for a business loan, the tips mentioned above will increase your chances of getting approved and meeting your goals.
