While shopping around for a business loan, you may have to compare offers by different financial institutions, and apply for the one that is most cost effective. But, at times, you can also negotiate the offer, as per your likes, for which you need to analyze the credit profile of your company, need of funds, and purpose of borrowing. You must also understand what all accounts in the loan, and factors such as interest rate, loan amount, tenure, and other charges.
Below-mentioned are things to understand before you negotiate a business loan offer for your company.
- Repayment Capacity
The loan amount sanctioned and other terms or conditions depend heavily on your repayment capacity and financial position of the company. If you can convince the lender that you can repay the loan over a specific period without risk of a default, then you can negotiate for the ideal interest rate and terms. If the bank is unsure about your repayment capacity, then it will take into consideration all the risk factors and offer you a suitable loan amount, rate, and tenure, based on the calculations.
- Risk Profile of Your Business
Like discussed above, the risk factors pertaining to your business will be accounted for when determining the exact business loan offer. The fund provider will identify the strengths and weaknesses of the company. A weakness could be not enough vintage, irregular cash flow, major slump in revenue and profit during off-season, etc.
Any strength will improve the chances of getting suitable finance, and vice-versa. Thus, it is important to study about the errors that can cause problems in the borrowing journey, and rectify those. Present your business as one of the best in matters of credibility and creditworthiness.
- Collateral Loan or Unsecured Loan
Understand the guarantees acceptable by the financial institutions to obtain a loan. Though unsecured business loans are easily available these days, at times, you may have to choose collateral loans. In such a case, being aware of the security is crucial. It can be anything from pledges and liens such as a fixed asset like a property or equipment, accounts receivable, investment asset, etc. The type of collateral depends on the nature of business and the credit worthiness of your business.
- Personal Guaranties
If your business has not been in operation for enough number of years, or there is a lack of financials as required to obtain a loan, then personal guarantees can come into view. Here, apart from the company assets, the bank will be interested to know if you have any personal guarantee to pledge. Personal guarantees can be your residential property, personal investments, etc.
The collateral is considered as risk coverage, especially in case of a default. It is advisable to keep sufficient stock of personal guaranties in case you do not have many assets on your company, but looking for a secured loan nonetheless.
- Loan Amount
Analyze how much you want to borrow and how much fund the lender is willing to provide. Borrowing amount on a business loan is between Rs. 1 lakh and Rs. 1 crore. One of the ways to know the loan amount you require is to determine the size of investment or the purpose for which the monetary help is required. Find a list of financing options that work the best for the situation, such as a secured loan on equipment, or an unsecured loan based on company’s financials, etc.
- Tenure of the Loan
What is the minimum and maximum period of loan the financial institution is prepared to offer? The tenure usually ranges between 1 year and 5 years. Choosing the shortest possible tenure will keep your interest payout lower than that applicable on a longer tenure. However, if smaller EMIs are what you can manage to pay, then a longer period will suit your loan affordability. Thus, choose tenure as suitable to your repayment capacity.
- Interest Rate
Interest rate on a loan influences the total cost of borrowing. Thus, negotiating for the lowest rate must be your priority when applying for a business loan. The rate of interest on the loan starts at 13%. But these rates may vary from one bank to another. If you have a good personal credit score and a good company credit score then you can negotiate for a low rate of interest. If not, you may opt for a secured loan for a better rate offer.
The interest rate applicable depends on various other factors than a credit score. These factors include – financial position of the organization and the profit it generates, future prospects of the firm, business vintage, etc.
- Repayment Flexibility
Check out the flexibility on repayment offered by fund providers. Is there an EMI-free period? Do you have to make scheduled repayments? Or, is your repayment schedule etched as per the credit utilization? It is important to understand the structure of repayment before selecting a loan scheme, so that you can plan your finances and not default in repayments.
- Documents Required
You need to submit a set of documents to the lending institution. These may include the GST certificate and GST returns of the last 4 quarters. You have to also provide KYC such as Aadhar card/PAN card of business/partners/directors/proprietors, ITR for 3 years with computation, Shop Act/Gumasta Licence, House/office ownership proof, proof of business vintage and operation, along with existing loan account statements/sanction letters (if any).
Make sure to keep all the documents in place before you apply for the loan. The financial documents and reports must be the audited ones. In case you are applying for the funds online, then keep a soft copy of the documents. If applying offline, then keep a copy of the documents for submission and originals along for verification.
- Prepayment Penalties
It is not necessary to carry a loan till the end of its tenure. The fund provider may offer the option of prepayment. Here, you can prepay the loan in advance and close it early. However, prepayment penalty could be applicable. The interest penalty charged is over and above the principal due.
The above-mentioned aspects must be thoroughly understood to negotiate for the best business loan offer. By understanding the preparations to be done before seeking the loan, the terms and conditions associated, and other factors, you can get a suitable loan offer.