Do’s and Don’ts Before Applying for a New Small Business Loan

As an entrepreneur, one of the many challenges you face is funding. Whether it’s product development, hiring employees, or buying real estate for your business- you need capital for everything. And the best way to get it is through an MSME loan for new businesses. 

Nowadays, getting a startup loan for new businesses is relatively easy. With digitisation, you can apply for a new small business loan from anywhere and with minimal documentation. But as attractive as this credit facility is, there are certain details you must consider.  

We’re here to help ensure you’re at par with all information about business loans for new businesses. And so we discuss the different types of business loans and the dos and don’ts to remember. Let’s dive in!

Different types of business loans

Here’s a quick look at the type of startup loans for new businesses.

#1 Working capital loan

These short-term loans offer a maximum loan amount of Rs. 40 Lakh. The maximum loan tenure is 12 months. This type of loan is ideal for meeting daily business requirements such as purchasing raw materials, paying employee salaries, etc. 

#2 Letter of credit

This is a bank document that guarantees that the buyer will make a payment to the seller. These are ideal for imports and exports where suppliers deal with unknown buyers. 

#3 Invoice discounting

This helps businesses generate funds by offering sale invoices as security. So, businesses needn’t wait for customers to pay; they can simply borrow from the financial institution by providing this document. 

#4 Loans under government schemes

The government has launched many schemes for MSME loans for new businesses to encourage small businesses. These include the Mudra Scheme under Pradhan Mantri Mudra Yojana, the Prime Minister Employment Generation Programme, etc. 

#5 Term loans

These are standard loans that need to be repaid over an agreed period. They can be short-term, intermediate, or long-term.

#6 Point of sale loans

A POS loan helps business owners divide a purchase into several small payments. While its interest rate is generally higher, it benefits startups facing a cash crunch. 

#7 Machinery loan

This credit facility is ideal for startups in the manufacturing industry. A machinery loan helps them finance expensive business machinery and equipment with ease. 

#8 Overdraft facility

Growing businesses often need access to quick funds. An overdraft facility helps them meet these urgent financial requirements. It allows account holders to withdraw funds exceeding their account balance. 

The do’s and don’ts of your first small business loan

#1 Do compare financial institutions

Avoid choosing the first lender you find when applying for an MSME loan for new businesses. Financial institutions have different loan terms, conditions, interest rates, etc. To ensure you find the right fit for your business, compare these features among different lenders. 

#2 Do have a plan and the required documents

Before you approach a financial institution, it’s essential to have a business plan. This will help you understand the loan amount and conditions best suited to you. Additionally, your lender will want to see your business plan to understand your revenue model. 

This helps them ascertain your business’s credibility and the safety of repayment. Further, remember to keep all business documents ready for a smooth loan application process. 

#3 Do examine your financial needs

Conduct a budget review and study your financial forecast before applying for a startup loan for new businesses. This will help you understand whether it’s the right time for a loan. For instance, if you have new investors joining, taking a loan will only add to your debt without providing any real value. 

#4 Don’t fixate on low-interest rates

While a low-interest rate is always preferred, don’t let it become your only criterion for a loan. Instead, consider all factors, such as loan term, lender policy, overhead charges, benefits, etc. This will help you gain the whole picture and make an informed decision. 

#5 Don’t pay back your loan too fast

As a growing business, avoid repaying the loan too fast. You might have earned a comfortable revenue to help pay off the loan. But the business world is uncertain. And keeping the funds safe for a rainy day is better. Further, your lender might levy a foreclosure charge, adding to the repayment amount. 

#6 Don’t apply with multiple lenders at once

While you might get a larger financial influx with multiple loans, avoid applying with more than one lender. This can reduce your credit score and negatively impact your future loan applications. 

Summing up

Applying for your new small business loan can be a daunting experience. With the options available in the market, it is easy to get confused and hit pause before even starting. But in times like these, it’s important to remember why you started and choose the right financial institution. 

We at Tata Capital applaud the entrepreneur in you. And through our attractive interest rates, quick approvals, and easy documentation, we hope to contribute to the success of your business. So, if you need a business loan for new businesses, think Tata Capital. 

To learn more, visit our website and apply for a new small business loan today!