Loans imparted to meet Short Term working capital gap arrangement are referred to as Business Loans or Business Installment Loans. Such loans can be availed by business houses from multiple loan providers such as Banks, NBFC, P2P lenders etc.
While there are myriad options available in the market, businesses should be cautious to resort to such loans arrangements as they are the most expensive forms of financing available in market.
Typical Business Loan cost includes the following-
Loan Interest is charged between 16-18%
Processing Fees can be charged upto 2%
Preclosure Charges – Can run up to 4%.
Before availing such loans from Financial Institutes, businesses should keep following 4 importants points-
1. Cost of Loan :-
The first and foremost thing a business owner should be asking himself is - “Is this the right kind of product at right cost?” Since its non-collateralised product is available in the market, rate of interest is high as mentioned before and tends to eat away bottomline nos.
2. No of Loans :-
While applying for loans, businesses tend to resort to easiest and quickest ways of applying loans with multiple lenders, which tends to affect credit score of the company. Bankers relate these Cibil checks with credit worthiness of company. More no. of Cibil checks performed generally indicates that customer loan has been turned down by those many no of Banks/NBFC & attract hawkish eye from current lender’s credit team.
Best approach is to take in principle letter from bankers/NBFC to confirm their intent on funding & apply strategically among shortlisted 2-3 lenders, as per ROI, Preclosure charges , Processing fees etc.
3. Prepayment Penalties:-
During the testing times of businesses, many business tend to succumb, to accept all the terms & condition mentioned in the sanction letter.
Prepayment penalty is a fee that lender charges if you settle your loan before the loan tenure/predefined tenure. Basically this penalty is imposed to discourage lender from early closure of loans, as it lead to loss of interest earning opportunity for lenders .
The point here is that difficult times may last only for a few quarters, but your loan is going to stay with you for good 3-5 years of time. Always ensure that Prepayment penalty clause is discussed and negotiated before acceptance of offer letter.
4. Alternate options of Funding:-
There are various alternative loan options available in market which are economical and better options than conventional business loans.
You should always ask your lender for various alternatives available for your current business needs. Few such alternate options can be-
Equipment Finance Loan - In this type of funding, equipment/Machinery of company gets hypothecated to lender.
CGTMSE - Government of India has come up with a credit guarantee fund scheme(CGTMSE) for micro and small enterprises in manufacturing sector, which extends up to 2 cr of loan by lending institutions against guarantee. This facility is available at cheapest cost of funds linked to base rate of lending institution.
Line of credit Facility - Few banks/NBFC’s come up with tailored solutions to meet your short-term working capital requirement in the form of Credit facility. This facility gives you the flexibility to use funds as per your banking needs and you will be charged only on borrowing .
With plethora of lenders available in the market, identifying a right lender, with right product mix at cheapest cost becomes of utmost importance for businesses. Any borrower should evaluate the above points before getting into any lending commitments.