As a promoter of a micro, small, and medium enterprise (MSME), you may need additional funds that cannot come out of your business operations. You may require this fund for reasons such as procurement of equipment or scaling up your operations. Some businesses are subject to seasonality, so you could require this fund to cover the expenses of incremental promotion or purchase of raw materials. Business loans are your solution for this.
Business financing includes loans advanced to a business house. Financial institutions offer business loans for new business. Like any other loan product, the borrower needs to repay the money along with interest within a stipulated time on a preset deferred payment schedule through EMIs.
However, you need to make sure the business loan enables you to scale up your operations and not become a debt trap. Here are some tips to ensure the same:
- Work On Your Creditworthiness
You need a healthy credit score to negotiate a lower business loan interest rate with the financial institution. For a high credit score, you must ensure timely payment of dues and avoid using up your entire credit limit.
A time-tested credit history works in your favour, as it carries weightage on your credit score. Therefore, it is advisable to keep your credit accounts open.
- Exercise Debt Management
You should not take on debts that are unaffordable. If you are struggling to repay a loan, cut costs and find ways to increase your sales turnover. Another option is the consolidation of loans. This entails merging high-interest loans into a single secured loan account.
- Pay Extra Whenever You Can
A business has its own cycle of ups and downs. There will be a time of incremental sales, thereby affecting the additional inflow of funds. In that situation, you should make extra payments to reduce your repayment load.
You could also use the excess inflow of funds to create a coffer for you. This may work as an emergency fund to see you through a lean period of the business.
- Check Out Government Assistance
MSMEs are the actual wheels of any economy. Governments do have packages to aid these categories of business through their own schemes. You need to be on the lookout for such scopes and avail the benefits whenever you can.
- Maintain Transparency With Your Lending Institution
It is always advisable to have a transparent line of communication with your banker. If the repayment of dues is becoming difficult, express the hardship proactively to the banker. It is better to communicate clearly than defaulting on repayment.
If your reasons are found plausible, the banks may allow an extended loan tenor. Apart from this, banks may also accept an amount lower than what is due. In certain circumstances, the banks may restructure the loan to lower the rate of interest.
In an extreme case, where repayment of business loans is becoming impossible for reasons beyond your control, banks may even go for a negotiated settlement of loan on a mutually agreeable term.
Therefore, the main takeaways from the discussion above are:
- Debt management is the key to managing business loans.
- You need to have the intention to repay your debts.
- Take advantage of the spikes in your business to repay your business loans.
Conclusion
Business loans are common these days, and the availability of a variety of loans enables a business to choose a fitting plan. When you are looking for a plan, always keep a trusted banking partner. Also, remember to efficiently manage the loans.
