Every business requires funds for its business operations. Funds might be needed for any reason like
- Expanding your business – When you want to expand their business by including a new service or opening more branches.
- Buying machinery/equipment – when your business has the need for special equipment or machinery to increase your productivity.
- Giving a new look to your business – when you want to redesign or expand your workspace.
- Having an online presence – when you are already own a full-fledged business and want to have a digital presence.
- Recruiting more people – when you require more manpower to increase your productivity.
- Purchasing Inventory – when your business needs stocks for upcoming projects.
Whatever your need might be, Small and Medium Enterprise (SME) loans are very convenient to obtain. But first, you have to choose your business requirements carefully. Once you pay close attention to your future plans, potential clients, expansion, and revenue related cycles you will have a strong business plan. It will help you analyze the type and quantum of loan you might need for your business.
Here are some important steps you should follow for raising funds for your business.
1. Analyzing the type of debt your business requires:
There are two things, you can choose when you need funds for your business, one is a business loan and the other is equity. When you choose equity it will result in sharing the ownership of your business with stakeholders. When it’s a business loan you will still be the sole owner of the company.
For example, if you are into a grocery store business, an investor will be ready to invest Rs.10 Lakhs on your business for a 20% share in your business. But you might feel it will be difficult for you to give that much share to your business. In those cases, you will feel that a loan is a better option.
There are secured and unsecured business loans for you to choose from. A secured loan needs collateral in the form of an asset. In the case of a loan default, the loan provider will recover the loan amount by liquidating the asset. In case of unsecured loans, most of the companies will not ask for collateral but the interest rate will be higher than that of secured loans. Do thorough research about all the options and choose the one which you think is best for your business.
2. Assign priority according to your needs:
Every business needs certain improvements to be done but each has different levels of urgency. You should be able to differentiate it and fund it according to the importance.
For example, a grocery store business will need funds for many things. You might need to restock your inventory for the festival season. You will think about changing the interior of the shop so that it will look appealing to the customer and so on.
But you should be able to prioritize which needs attention first. Loading up your stock is very important during the time of festivals. Interior work can be done during off-season times. So once you start prioritizing your business requirements you can best use your business funding.
3. Determine your funding requirement:
Sort out your financial requirements and estimate whether you need short term funding, medium-term funding or long term funding. For example, in a grocery store business loading up your inventory is short term funding. Whereas when you want to stock your inventory for the future then going for medium-term funding is a better option. But when you are looking for funds for redesigning your interior or opening new branches, it will come under long term funding. If you are looking for a low-interest rate then long term funding is a better option. But when you are opting for short or medium-term funding you will have higher interest rates because of the loan tenure.
4. Make sure to access your repayment capacity:
When you plan your financial report it will include budget, sales, and the expenses that will help you in measuring your repayment capacity. When you want to get a loan make sure to choose the right amount of loan which you can afford to take.
You can start that by creating a spreadsheet with all the details and your requirements. When you start doing that you will know an idea about what type of loan you will need and how you can plan about repaying it. It also means you act professionally in estimating your returns. Also, that plan will help the lender in analyzing your previous loans and assessing you before sanctioning your funds.
5. Debt: Income ratio should be healthy:
The CIBIL score depends on both your debt and income. So always maintaining a healthy ratio between the two will make your business look reliable. It will be calculated by comparing your total assets and your liabilities. You should make sure to get less debt than your income to meet the repayment needs. When you are looking for a business loan make sure your cibil score is less than 30%.
6. Which loan type will suit you?
All the loans will have certain eligibility criterias which you should meet when you want to apply for that loan. Most of the financial institutions offer business loans online, you can avail it and benefit from it. They will have some requirements like
- The age of your business should at least be a year
- You should have registered your business
- The financial status of your business should be submitted
- History of your current debts and loans
- Documents related to your income tax filings
- Credit reports are important for certain loan types
When you qualify all the above things you will be eligible for most of the loan types. After that, you need to look for the right amount of loan which you might need and the plans which you have for repaying the same. Before taking a loan you should look out for all the possible outcomes and the techniques through which you can repay the loan.
Following all the necessary steps will make you avoid risk and repay the loan EMIs on time without facing any financial crunches.