Businesses of any kind, whether wealth creating or non-profit, need funds. A business that is running out of cash is in a dangerous position, as without it, operations will come to a complete stand-still. Funds are needed to purchase assets, equipment, inventory andproperty, expand operations and at times, increase working capital.
So how can a business ensure that they are not short of funds?
Every business model has policies that ensure continuous supply of cash for running the business. In case there is a requirement of extra funds for an unforeseen expenditure or large scale acquisition, the company must procure funds by availing loans from banks. A person with a small business idea may not have the required funds. In this case, he must go for a start-up business loan. Banks are all too ready to extend loans to a business they believe is performing well and can repay the loan without default and to new business ideas that they believe will be successful.
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Availing a loan from a Private bank is slightly different vis-a-vis a Public bank. The difference in interest rates, processing time and fees, and repayment policies must all be considered before taking a decision on where to apply. Some of the differences between the two banks are as follows:
Processing fees – Many private banks employ Direct Selling Agents (DSAs) to procure customers. These agents demand a commission and this is reflected in the processing fees that the customer is charged. Public banks have comparatively lower processing fees as they work on a more direct approach.
Convenience and efficiency – Private Banks offer a better experience and are much more efficient in the services provided, as they often have targets. Public banks require a lot of work from your side. The process is much slower compared to a private bank.
Processing Time – if the loan requirement is urgent, then you would be better off,availing the loan from a private bank as the entire process takes less time. Public banks are more stringent and there could be a delay.
Prepayment – For private banks, the minimum time an applicant needs to wait before making pre-payment is 6 months. This maximizes the interest earned by the bank. Early pre-payment carries extra charges. Public banks have no such clause and pre-payment can be done as per your wish.
Having clear answers to this question can instil confidence in the lender. Knowing the exact purpose and amount required, shows there is a proper plan in place for the use of funds and subsequently for repayment. Borrowing “as much as possible” to fund the requirement is a bad idea as the fees and interest payment would be high. Only borrow what is needed for the business and no more.
Checking the credit rating of both the business and the proprietor is essential for a loan application. Lenders will take both credit ratings into consideration before approving the loan. Business loan interest rates are also influenced by the credit score. Even before applying for the loan, practice good financial policies to build up your credit score.
While applying for a loan, go through the enclosed documents carefully to get a picture on all the fees and charges to be paid to the bank. As each lenderhas different charges and rates, it pays to compare all documents and then decide the best option.
A line of credit is similar to using a credit card where a maximum limit for borrowing is set and the interest is only payable for the amount actually used. For a smaller business or short term requirement, this may be more beneficial than a traditional loan as it carries lower costs.
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