Funding is imperative for a business to start and continue to grow, regardless of its size and stage. This financing comes mainly from the own resources of the promoters as well as from external loans.
In the formalized lending space, today we have a range of lenders ranging from PSU banks, private banks, NBFCs as well as new age fintechs. With several financing options available, it’s important to know how to choose the right one.
Although access to the Internet and various online platforms made it easier for the client to assess and compare different lenders; Let’s try to understand the important factors to consider while comparing lenders and choosing the right one for you.
Reputation of the lender in the market
It has become handy to look at any bank or NBFC by searching online. Many customers share their comments and experiences online. While these reviews may or may not be the most accurate representation of the facts, they certainly help select a few options. Entering into a loan deal with a lender who does not have the proper infrastructure can lead to unnecessary hassle.
Application and process ease
While the application process and documentation (KYC, bank statements, financial statements, etc.) seem more or less similar across the industry, there are nonetheless some lenders who offer a simpler process with less documentation and a faster turnaround time through digitization.
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The feasibility and accessibility of the application process must be assessed. Many times customers are left behind due to the lack of certain documents or formalities. This wastes time and may lead to redoing the application process for another lender.
Loan amount and ownership requirement
A business loan is generally an unsecured loan; however, many lenders seek the ownership of at least one of the promoters as a criterion of stability and contactability. Moreover, the unsecured item results in a big difference in the loan amount between different lenders. While some limit it to Rs 30 lakh, others offer up to Rs 75 lakh.
Terms and ease of repayment
In order to maintain creditworthiness, the timely repayment of the EMI is extremely important. Nowadays, lenders offer various options for the customer to repay their loan. Choose a lender who offers flexibility in repayment. The EMI date is also important for some companies based on their receipts, payment cycle and salary payment dates etc. It is also worth researching prepayment options and associated fees when obtaining a loan.
This is often considered the most important factor because the cost of borrowing not only affects cash flow, but also impacts the finances of the business. You have to compare the interest rate, processing fees, criminal fees and foreclosure fees, etc. Interest can also be fixed or floating.
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There are also insurance attachments to the loan in the event of death, permanent disability, etc. Some options leave the lender as the sole beneficiary while in some cases, depending on the loan amount served, part of the claim amount is transferred to the legal heirs of the borrower after the outstanding loan is closed.
It is difficult to find a lender who fits all of the above factors according to the client’s expectations. Ultimately, choosing a suitable lender requires finding the right combination of all the important factors. Business owners can also finalize the lender by prioritizing their needs and then picking the ones that best meet them.
(The author is a business manager for unsecured loans and partnerships for SMEs at Clix Capital.)