4 Things SMEs Should Know When Taking a Loan

Raj Khosla, Founder and MD, MyMoneyMantra.com talks about four factors that SMEs facing a liquidity crunch due to the ongoing slowdown should take note of when taking a business loan

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During an economic slowdown, small and medium enterprises (SMEs) are among the worst hit due to liquidity crisis in the market. Such is the case right now where SMEs are finding it difficult to raise business loans from banks and other non-banking financial companies (NBFCs) for their business needs.

Raj Khosla, Founder and MD, MyMoneyMantra.com in a conversation with Entrepreneur India talks about four important parameters that SMEs should look at when taking a business or secured loan.

Fixed or Floating Rate

Finding a loan that offers cheapest rate of interest is important. But, it is more important that you check whether a fixed rate loan suits you better or a floating rate loan does.

A fixed rate loan tells you the installment amount upfront that will remain same throughout the loan tenure. This helps to manage personal finances better as the EMI outgo will not change. However, it usually costs more than a floating rate loan.

Related Read: Difference Between Fixed and Floating Rate Loans

Moreover, Khosla says that a floating rate loan during a slowdown is a better option to opt for. “A slowdown usually witnesses a falling interest rate regime. A floating rate loan linked to an external benchmark is definitely a better option in today’s soft interest rate regime,” he says.

Foreclosure and Lock-in Rules

Most business loans come with a foreclosure charge that can range from 3-5 per cent. Most importantly, check the lock-in period rules with your lender.

“Suddenly you get a windfall that you want use for pre-paying a part of the loan but you discover that there’s a lock-in period within which you can’t prepay your loan. It can be a double whammy as on one side you have to keep paying interest on your loan whereas on the other side you earn a paltry 3-4 per cent interest on that amount while waiting for the lock-in period to get over,” explains Khosla.

Insure the Loan

After you take a loan, make sure to insure it so that it doesn’t become a burden on your family if something was to happen to you.

Instead of taking insurance that comes bundled with loan agreement sold by banks or other lenders, buy a term plan equal to the amount of the loan separately. Once you have repaid the loan, just stop paying premium to discontinue the plan.

Loan Overdraft Facility

The loan account with overdraft facility is linked to your bank account. Any amount deposited in the loan account above the EMI is used as a pre-payment towards the loan but if you need the extra deposited amount, you can withdraw it.

Related Read: 4 Things to Know When Taking a Personal Loan

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