Manage Business Loan after getting funds

How to Manage Business Loans After You Receive Funding?

The micro, small, and medium-sized enterprises (MSMEs) are the growth engines of the Indian economy. These businesses have contributed immensely towards India’s rapid economic growth that we have seen during the past few years. MSMEs’ contribution to India’s Gross Domestic Product (GDP) stands at 30%[1]and they are responsible for employing approximately 11 crore people in the country.

MSMEs form a crucial part of the supply chain and contribute around 40% to India’s overall exports. Interestingly, MSMEs are entwined with the country’s rural development, as more than half of them are in the rural parts of India.

However, despite being an integral part of India’s sustainable development, these MSMEs face enormous threats and challenges for their survival and growth. These challenges range from financial to operational to administrative to logistical issues. A highly significant challenge for MSMEs in our country is the lack of finances and easy availability.

As per a report by the Association of Certified Chartered Accountants in India (ACCAI), 80% of the MSMEs lack access to formal business credit. The decline in economic activities during the COVID-19 lockdowns has further escalated this problem.

The Silver Lining

The good news is that the Government of India has recognised these challenges faced by the MSMEs and is coming up with potent solutions for them. It has not only prepared a framework for the banking industry to provide easy business loans to MSMEs in India but also launched several Government schemes to help businesses secure easy funding.

Let’s look at some of the ways through which businesses can get access to business loans in India:

• Banks

Banks are the first thing that comes to our mind when we apply for any loan. They are the most traditional form of lenders that provide business loans in India. One can approach any private or Government-owned bank to avail a business loan. Banks are the most reliable and convenient source of getting money.

However, a business loan from traditional banks has some disadvantages too. Firstly, they have a stringent eligibility criterion and usually provide business loans to well-established businesses only. Their documentation and verification processes for approving business loan applications are also quite lengthy.

Secondly, business loan interest rates charged by banks are usually on the higher side. They are also less flexible in terms of loan tenure and loan amount.

• Non-banking financial corporations (NBFCs)

NBFCs are entities or institutions that offer similar services to that of a bank but do not hold a banking license. As of January 31st, 2021, there were more than 9,500[3] registered NBFCs in India. Most of these NBFCs provide collateral-free financing to small business enterprises.

There are several advantages of choosing an NBFC over a bank to avail a business loan. The most notable one is that NBFCs have flexible eligibility criteria for approving business loan applications compared to banks. They usually follow a relaxed approach to ensure easy financing for their customers. One can easily qualify for a business loan with an NBFC even with a lower credit score and little business experience.

Also, the interest rates levied by NBFCs are lower than banks because they are stipulated as per the Prime Lending Rate (PLR), which is not regulated by the Reserve Bank of India (RBI). Therefore, they enjoy greater flexibility and vary their business loan interest rates to attract a more extensive customer base.

• Government’s credit schemes

The central Government of India and various State Governments have introduced several financing schemes to help MSMEs expand and flourish. To avail of business funding under any of these schemes, one needs to approach the government's authorised financial institutions or central nodal agencies appointed to manage their schemes.

The primary benefits of availing of business loans under these Government schemes are that they are reliable, easy to get, and come with very low-interest rates. Some of the top Government-backed business loan schemes in India are:

- Pradhan Mantri Mudra Yojana (PMMY)

- Credit Linked Capital Subsidy Scheme (CLCSS)

- Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)

- National Small Industries Corporation (NSIC) Subsidy

- PSB/MSME Loan in 59 minutes

- SIDBI Make in India Soft Loan for Micro, Small, and Medium Enterprises (SMILE)

- Start-up India, Stand-up India, and Make-in India

Managing a business loan after receiving the funding

As a business owner, you can approach any of the lenders mentioned above to provide financing for your business. If you want very high-value loans for your business, you can approach a traditional bank as they are well equipped to offer business loans to large companies.

On the other hand, if you're in the developing cycle of your business, you can approach an NBFC or take the help of a government-backed business loan scheme to get access to short-term credit.

However, before applying for a business loan with a lender, you should be very clear in your mind about its purpose. Remember that you will have to pay interest on your loan amount and hence, you need to use it very wisely. Managing a business loan is as important as receiving it.

Below are some of how you can use your business loan:

1. Buying raw materials for your manufacturing business

If you’re into the manufacturing business, you may need to buy raw materials and successfully convert them into usable products. Sufficient inventory is necessary for the optimum production of your business. It is also essential to ensure that you fulfil all market orders on time for maximum customer satisfaction and a positive brand reputation.

You can use your business loan to buy the raw materials required for your manufacturing business. This way, you will never face the shortage of working capital and the lack of inventory. Even if your payment cycle gets disrupted, you can continue with your production cycle.

2. Expanding your business premises

At times, you may need to extendyour business premises or set up new locations to expand your business. Expansion of business space may also become necessary to ensure smooth operational flow. For instance, if you’re into a logistics business, you may need to set up warehouses at different locations for proper supply, storage, and delivery of shipments.

You can use your business loan to purchase or lease commercial properties, which are usually very expensive. You can also use your business loan to upgrade your business infrastructure for ensuring maximum efficiency.

3. Procuring new equipment and machinery

Adequate machinery and up-to-date equipment are essential to ensure your business' productivity and efficiency. You may need financing to upgrade your business machinery and equipment from time to time. For example, if you are into the transport business, you may need to add more trucks to your fleet to increase your business efficiency.

You can use your business loan to procure additional equipment, vehicles, and/or machinery for your business. You can also use it to purchase or lease other tangible assets required for your business, such as office furniture, computers, medical supplies, etc.

4. Revamping or renovating your business premises

You do not want your business premises or office space to look like an old, dampened building. Hence, it may become necessary for you to spend some money on revamping or renovating it. A beautiful space is also essential to motivate your employees and attract more customers. You can use your business loan for this purpose too.

Revamping or renovating your business premises may ask for quite a bit of expense. You may have to hire carpentry, masonry, paintwork, etc. You may also have to purchase the materials required for this work.

5. Tackling seasonal cash-flow requirements

Shortage of cashflow can become a huge problem for you if you’re into a seasonal business. For example, if you’re into the business of producing bridal clothing, you may face huge demand during wedding seasons. You may start struggling at such times if you don’t have the required finances to fulfil increased consumer demand.

A business loan can come to your rescue in such situations. You can use it to tackle the cash flow shortage that may occur during peak seasons. You can also use a business loan to bridge the gap between when you raise the invoices and the release of payment by your customers.

6. Hiring and training your workforce

The employees form the backbone of any business organisation. Their contribution is vital if you want your business to flourish. That is why it’s very crucial to have an adequate and skilled workforce for your business. When you’re expanding your business, you may need to hire even more employees to ensure the optimum flow of your business at every level.

You can use your business loan for hiring and training new staff for your business.You can also use it to pay wages to your existing staff during crises.

7. Starting a new venture

You can also use your business loan to start new ventures or to add new dimensions to your existing business. For example, if you’re into the textile business, you can use your business loan to start a new café or a restaurant. Doing so may provide you with a chance to diversify your business and make sure that you continue to earn well even if one industry undergoes a slump.

You can use your business to make new acquisitions, mergers, or takeovers as a part of your business expansion. Many business owners try to increase their market share by acquiring small competitors in their fields.

Tips to remember while managing your business loan

Now that you know how to use a business loan, let’s talk about some tips that can help you manage it properly:

1. Never borrow more than what you require

While borrowing a business loan, it's crucial to borrow only the amount you require. Unnecessarily borrowing a high amount can swell up your EMIs and put unwanted financial pressure on your business.

2. Be clear on the reason

You need to be very clear on your reason for borrowing a business loan. Remember that you will have to pay the entire amount along with the interest. So, it makes no sense to borrow a business loan without having a concrete reason for it.

3. Pay all your EMIs in time

After you borrow a business loan, you need to repay it to the lender in Equated Monthly Instalments (EMIs). It’s very crucial to pay all your EMIs in time. Failing to do so can not only ruin the reputation of your business but also prevent you from taking more credit in the future.

4. Create a plan

You should create a well-drafted plan to spend and repay your business loan. You should be able to clearly define how you want to use your business loan and how much amount you want to dedicate for each purpose. You should also define how you plan to repay your business loan EMIs.

5. Keep in touch with your lender

As much as it is important to manage your business loan, it’s equally important to keep in touch with your lender. Depending upon the circumstances, you can ask your lender for an extension of your repayment tenure, a reduction in the interest rate, and debt settlement.

To Conclude

Using the tactics mentioned above and strategies, you can use and manage your business loans better. Without proper management and utilisation, a business loan can do more harm than good to your business. Choosing the right lender for your business loan is crucial as it can simplify your lending experience.

Poonawalla Fincorp provides Business Loans for all small and medium-sized enterprises in India. Our business loans come with simple eligibility criteria and a host of features to help you grow and flourish. You can look at our loan offerings and select a product that's best suited to your requirements.

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