Feb 15, 2017 02:07 PM IST | Source: Moneycontrol.com

Five myths about business loans you must steer clear of

It is not difficult to fund your business with borrowed money, but do not fall victim to myths.

Five myths about business loans you must steer clear of
Ranjit Punja

Are you tossing the pros and cons of taking a business loan? Perhaps a bit anxious about the implications? Or maybe unfamiliar about the process involved?  If you want a loan to expand your business, improve your cash flow, buy inventory, invest in office space or equipment, or simply consolidate your business debts, then a business loan might be a good option.  Here are some facts about business loans to consider as you start 2017.

Myth 1 – A personal loan is a better option than a business loan

Personal loans are one of the most expensive loans on the market, and you can get a business loan at a much lower cost. Depending on your credit score, personal loans can come with interest rates of up to 30 percent per annum. Perhaps the only advantage of a personal loan is that you can use the loan amount without any restrictions, but that flexibility might be negated by the much higher cost of the loan. Also, keep in mind that a business loan can be eligible for tax benefits.

Myth 2 – Use your savings instead of taking a business loan

It is unwise, even risky, to eat into your personal savings for the health of your business.  In the unfortunate event that your business fails to take off, not having any personal savings to fall back on can lead to unnecessary financial problems. The result – you will need to borrow again at a high interest rate to finance your living expenses.

Myth 3 – Your personal credit score will not impact your business loan application

While the main focus while considering your loan application is the health of your business, your personal credit history is also an important factor. It gives lenders an accurate idea of your financial behaviour. If you have a good individual credit background, your chances of being approved for a business loan are stronger.  

Myth 4 – It is difficult and cumbersome to get a business loan

On the contrary, if you have a good business and personal credit score, and have a sound plan for how you will use the loan amount; the process for securing a business loan is no more difficult than say, a housing loan. While you might not need to provide much documentation when taking a personal loan, you will also be paying for that convenience in terms of high interest rates.  

Myth 5 – Big banks are best for business loans

Do not eliminate any options with pre-conceived notions. You might be surprised at the various options and advantages offered by competing lenders. Your small local NBFC might offer excellent terms, a big bank might offer a wider array of loan products to select from, or you might already have a good relationship with your existing PSU bank and have a simple loan approval process. In addition, the newer fintech players might be able to offer you lower interest rate or a simpler process.

Shop around and see which loan offer best suits your particular requirements in terms of loan amount or tenure or interest rate or documentation other repayment terms.

Taking a business loan makes eminent financial sense as opposed to using other sources of funding your business like a personal loan or your savings. Go ahead and explore the world of business loans on offer in India today – you just might well find an offer you can’t refuse.

The author is CEO & Co-Founder of creditmantri.com
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