Decoding Business Loans For Young Entrepreneurs
While applying for any business loan, the young an entrepreneur should consider these important things
Gone are the days where the youth take up conventional jobs or follow their father's footsteps to expand the family business. The young minds are constantly searching for opportunities, evaluating options and designing unique solutions to address age-old problems or ease everyday life. Today, the surge of the start-up culture has simplified payments, hiring cabs, connecting with old friends, finding new jobs, and has created renewable energy sources, alternative waste management systems and so on.
However, being an entrepreneur and running a business, especially at a young age, poses several problems. Growing the business, tapping into the market, recruiting the right team, standing strong against competition are just some of the challenges that start-ups face. Young entrepreneurs require financial assistance to realize their ideas and make them profitable. Funding is important to survive and face everyday trials for any business. One of the options they have is to take a business loan to meet their financial requirements.
While the young entrepreneur can approach a venture capitalist or investing firms, getting a business loan is preferable as:
- A business loan is easier to obtain
- A business loan does not need the dilution of equity
- Financial institutions have structured offerings to fund different requirements
- Only the interest is paid
- Financial institutions do not partake in the business' profit or loss
Let's understand the different types of business loans available to entrepreneurs. They can be categorized as follows:
Short term loans – Short term loans can provide assistance for working capital needs.
Long term loans – Long term loans can help fund long term goals such as business expansion.
Secured loans – Secured loans require some form of collateral, thus offered at a lower interest rate.
Unsecured loans – Unsecured loans do not require collateral and are provided on the base of the borrower's credit score at a higher interest rate. Unsecured loans are usually short term as the risk of return are higher.
Overdraft – Overdraft loans are based on collateral, usually in terms of a Bank Fixed Deposit. Depending on the credit score, cash flows, duration of the banking relationship and the repayment history of the business, an overdraft limit is set. The interest is charged only on the overdraft amount used.
Working Capital loan – Working capital loans are provided for the sole purpose of utilizing the funds for the business' working capital needs. With a lower interest rate than an overdraft, this loan also requires collateral. The bank monitors the receivables, inventory, cash flow, etc., with the power to revoke the loan if the set conditions are not being met.
Term loan – Term loans are a standard type of loan, where the entire amount is disbursed with an EMI plan for a specific duration.
While applying for any business loan, the young entrepreneur should consider the cost of taking on the loan. This includes the interest rate, processing fee, documentation fee and other applicable costs. The time to disburse the loan and the repayment period should also be taken into account. The most crucial factor to secure favourable terms on a business loan is the borrower's (business or promoter) credit score. Since most of the business loans require collateral, adequate thought should be given to what asset can be considered as suitable collateral for the loan. The asset can range from any existing equipment, property to the expected revenue.
Once the loan has been processed, it is important to keep up with the payment schedule and avoid defaulting on the business loan. The following pointers can help the borrower to stay ahead of the payment plan.
- Know all the important payment dates for the loan to ensure that there are sufficient funds to make the payment.
- Maintain a sufficient balance in the account to avoid defaulting on the loan.
- If there is a chance that payment will be missed, be proactive and talk to the bank in advance.
- Reschedule the loan if there is difficulty in maintaining the current repayment structure. The interest rates will be revised and the loan tenure will be extended, making the debt more manageable.
- Refinance the loan from another lender if payments have been missed and the current terms of the loan are difficult to maintain.
The youth are the frontrunners of our economy. Their efforts to entirely change the way we live, beseech the government, industries and financial institutions to assist them in reaching their goals. Procuring a business loan can ease their financial worries and uplift the manner in which their business is conducted, taking their business plan to the next level.