How to choose the right credit option
when choosing a Business Loan

When you run a business, there are financial requirements, whether planned or unplanned, that lead you to consider a loan. This could be to meet a temporary cash flow issue, invest in the growth of your business or to create assets that will generate returns. Keeping in mind the variety of requirements, it is obvious that a single simple solution for loans cannot meet all these requirements.

With the growth of banking and other finance options, finding a loan suitable to the requirements is a fairly simple task. However, borrowers can sometimes get confused between the various options and end up choosing a loan that costs more in interest payments or is an amount that is too little or too much, leading to cash flow management issues, or is not flexible enough to accommodate any changes in the situation later, if required.

Keeping in mind the various options available, the key parameters of deciding on a loan can be defined by the following:

Size of the loan: the size of the amount you need to borrow is usually the first criteria on which the type of loan is decided. If you are looking for a relatively large value loan, getting a Loan against Property (LAP) is a good idea. This is a secured loan that allows you to take up a significant borrowing at a very low rate of interest, as compared to the other loans available. Other loans that can be taken against secured assets include Loan against Gold (LAG) or against equipment/vehicles owned. Loans are also available against securities/mutual funds/savings certificates, and the loan amount available is based on the value of the asset.

Tenure for which the funds are required: If the loan is required for a relatively shorter period, going in for a loan against gold or securities is a better option, since other assets such as property require significant paperwork, even at the time of clearing the loan.

Repayment capacity: If you are looking for a short-term loan for a project, but do not have the immediate capacity to pay in monthly instalments, a gold loan can be a viable option. Some lenders offer the option of paying only interest on the gold loan during the tenure of the loan and settling the full repayment at the end of the loan. On the other hand, if you have an assured cash flow which will support monthly instalments, go in for a personal loan or other type of loan that ensures the total interest you pay reduces with each EMI.

Flexibility of loan repayment: If you are not in a position to start repaying the loan immediately, look for options that allow you to start payments after a certain period of time or allow you to pay only the interest before the full EMI starts. This initial period is called a moratorium, and the interest due is calculated into the EMIs to be paid later. This is mainly used for equipment loans and business expansion, where the new business may not start generating returns immediately on setting up, for example a hospital or a manufacturing facility.

Interest Rate: Most people concentrate on only the interest rate while choosing the loan, but the fact remains that if the loan is for a short period of time, the difference between interest rates may not matter so much. The quantum of the loan, the repayment period etc. have a greater impact and therefore this factor has been included last.

By keeping in mind the various factors that determine the choice of a loan, you are in a position to choose the right loan based on the situation at hand, and can find the right option that best suits your needs.