Taking a Loan can be a Risky Affair Too

THE STARTUP WORLD

Since loans do not come for free and enterprise owners will have to pay the interest along with it, it is necessary to do some research on the interest rates of different money-lenders. Undoubtedly, business leaders and entrepreneurs should ultimately select the lender that offers the lowest interest rate. Lesser interest rates will certainly keep the reimbursement amount within sensible limits

If you are an entrepreneur or small business owner you will have to take a loan at some point of time. However, it is imperative to understand when and why to take a loan. Else you may fall into a trap of loans. Due to technology everything has become relatively easier now-a-days and taking a loan is no exception; business persons/entrepreneurs can apply for a loan a lot easier than ever before. "Calling up a sales executive of a financial institution usually gets the job done. Small business owners and entrepreneurs often find themselves in sticky situations which compels them to opt for business loans. To boost their company's production or just to keep their business afloat, a small business loan sometimes becomes a necessary aspect in the entrepreneur's/businessman's success journey," says Namit Jain an entrepreneur in the B2B domain.

He explains, "Usually, some kind of collateral is necessary to secure the loan and often these encompasses some of the assets of business such as real estate, bonds, equipment and so on. Since there is a lot to put at stake, business owners/entrepreneurs often tend to think a lot before applying for a business loan. After taking a loan, the repayment also requires a lot of obligations and if not done properly these factors can certainly become a financial liability."

So what are some of the factors to consider before taking business loans? "Well understanding the necessity to take loans is the first step to consider before opting for business loans. Businesses/enterprises often need loans for purchasing more inventory, leasing better and bigger space for business, investing in marketing for business, recruiting more employees and so on. As an entrepreneur you must analyze the factors that are compelling you to go for this option and think of ways by which they can be avoided," says Jain.

Shruti Goswami who works with a business consulting firm agrees with this vein of reasoning. She adds, "As an entrepreneur, one must also understand the fact that before handing over the desired amount in terms of loans, the bank is going to ask the reason for needing such a hefty amount. Today there are a number of sources to seek funding regarding business/enterprises, apart from banks. There are some companies as well that specialise in offering more flexible repayment options. Therefore one must analyse the circumstances aptly before jumping right in."

One must also calculate one's collateral capacity. "Generally, collateral includes some movable and immovable properties such as buildings, cars, stocks, bonds and cash and many such things that are easily convertible into money to repay the loan. One of the biggest advantages of having collateral is that the business/enterprise owners shall remain eligible for loans and their application won't immediately be rejected. Collaterals are the safest way to assure the banks that one has the assets to repay the loans in the worst case," says Goswami.

The current interest rates should also be taken into consideration. "Since loans do not come for free and enterprise owners will have to pay the interest along with it, it is necessary to do some research on the interest rates of different money-lenders. Undoubtedly, business leaders and entrepreneurs should ultimately select the lender that offers the lowest interest rate. Lesser interest rates will certainly keep the reimbursement amount within sensible limits," says Jain. In Shruti's words, "Also, one must be prepared about the secreted charges the lender might have in the pretext of administration fees, processing fees and appraisal fees and many more. It is wise to consider all the expenses and not alone the interest rate to settle the lender."

Both Jain and Goswami reiterate the importance of knowing one's credit score.

"One's credit score plays a major role while applying for a loan. Since many lenders will evaluate the credit history before approving the business loan it is necessary to ascertain that one's credit score is strain-free. To fix any issues related to credit score, the business owners should get in touch with the credit company to resolve this issue at the earliest," Goswami concludes.

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