How to Determine If Your Business Needs a Loan - Tata Capital

How to Determine If Your Business Needs a Loan

Mar 07, 2017

One of the biggest challenges of starting a business is making sure you have enough funds. Established firms also need finance for daily expenses and future growth. To ensure you have adequate money, it is essential to make an estimation of your financial needs and to assess your current financial situation.

Businesses have to evaluate the following factors before they apply for a loan:

  1. Estimation of Financial Needs
    Funds may be needed for two main reasons: to start-up and to run the business. Start-up expenses includes purchase/rent of premises, legal and professional cost for registration and incorporation, license fees, asset purchase, office stationary, inventory and many others. Firms also require finance to fund daily operations like salaries and wages, marketing and advertising, and to pay off debts. It is thus important to assess the amount that has to be borrowed.
  2. Determine Your Current Financial Position
    Once the reason for borrowing has been established, it is necessary to examine the current business financial situation. This helps determine the amount to be borrowed. If your financial position is weak, you may have to borrow a huge sum. Also, the tenure of the loan will be longer, as your capability to pay monthly EMIs will be lower. On the other hand, you may have to borrow a smaller sum if your financial position is stable. Some businesses may need funds for unexpected, unforeseen events.
  3. Determine at What Stage of Development Your Business is in
    The need for finance is more critical during transitional stages. Start-up firms require a greater amount of finance as they generally do not have any revenue of their own. Most start-up businesses get self-funded initially, as such businesses are high risk and limited funding options are available. A firm in the growth stage looking to scale rapidly may require expansion capital. Companies in the expansion stage may choose from government grants, long-term loans, and venture capital.
  4. Level of Urgency of Fund Requirement
    Often, businesses make the mistake of applying for finance under pressure. It is hard to get approval from lenders when the company is in financial trouble. A wiser option would be anticipating needs in advance. This helps firms secure funds well in advance of a crisis.
  5. Applying for the Loan
    After determining the reason for and the amount of a loan, you may have to decide on how to get a business loan. You may choose from various financial institutions and banks. Make a well-informed decision based on different types of loans, interest rates of various lenders, loan terms, security, loan process and process of how to apply for a business loan.

Most often, there is a revenue gap and lack of capital for financing start-ups and growth. It is necessary to determine how much funds are needed and apply accordingly, based on the financial position of the company. Anticipate needs on a prior basis, instead of borrowing during a crisis. Understanding finance requirements is imperative to make any venture successful.