Pratik runs a small-scale fitness centre in his city. As the business became steady and profitable in the past few months, he finally decided to expand his operations. To finance this business expansion, he chooses to opt for business finance – an SME loan.
Thanks to the internet, he was well-versed with the business loan interest rates, the application process, and the documentation required. But one thing he still couldn’t figure out was the tenure of the loan. Since it was still a new business – only 2 years old – he wasn’t sure how to determine a suitable loan tenure that wouldn’t affect his business operations.
Should he opt for a short-term loan or a long-term? How can he ensure smooth repayment? If you’re also feeling stuck, just like Pratik, then this guide is for you!
What is the tenure of an SME loan?
Thousands of small and medium business owners like Pratik benefit from affordable SME loans. You can apply for business loan to expand or modify your operations, upgrade technology, meet your cash flow needs, etc. Depending upon your requirements, you can easily opt for a loan for a flexible tenure ranging from 12 months to 60 months at fixed business loan interest rates.
Here are a few tips to help you decide on a suitable tenure when looking for a business loan.
1. Determine your cash flow requirements
Before you decide to apply for business loan, make sure to assess your affordability. When it comes to repaying your business loan, timing is everything. You need adequate funds available whenever your monthly payment is due. And a poorly planned repayment schedule can put a severe financial strain on your business.
Consider this. Your loan payment is due, and you manage to pay it on time. However, now you have limited cash available to meet your business obligations. Certainly, you will struggle to pay other expenses or even postpone them. On the other hand, if you choose to delay your EMI payment, you run the risk of penalties, and your credit score might take a hit. Thus, further affecting your business’ financial position.
So, you must accurately analyse and forecast your business’ cash flow needs. At the same time, make sure you don’t borrow more than you need. Choose a loan tenure that fits your budget and apply for a loan amount that you can easily repay without straining your business finances.
2. Consider your current and future financial position
If you’re just starting and your short-term business cash flow is uncertain, you might want to allow yourself more time. In that case, a long-term tenure might make more sense as you will have more time to repay the loan.
However, in an unpredictable and volatile market situation, it might not be easy to ascertain the future of the business. Here, even a 5-year loan term might seem like a big commitment. And short tenure might seem like a good starting point.
3. Check the type of loan you need
In most cases, lenders offer SME loans in various forms – term loans, working capital loans, overdrafts, cash credit, and more. Here, your loan tenure will also depend on the type of loan you borrow. For instance, working capital loans are generally short-term loans with a repayment tenure of up to 12 months. And a term loan comes with a repayment tenure of 12 months to 60 months.
At the same time, you also need to determine which type of business finance you will qualify for. Often, a relatively newer business might find it difficult to qualify for a longer tenure simply due to the lack of financial history. In which case, opting for a short-term may be your only choice.
Ready to apply for business loan? Here are some of the top SME loan schemes you can apply for –
- Pradhan Mantri Mudra Yojna
Under this scheme, eligible applicants can opt for loans of up to Rs.10 lakhs for a repayment tenure of 3-5 years at affordable business loan interest rates.
- MSME business loan in 59 minutes
As part of the Atmanirbhar Bharat Campaign, MSMEs can receive instant loan approvals for a loan amount of Rs.1 lakh to Rs. 5 crores for diverse business purposes.
- Stand-up India
The government extends SME loans under this scheme to business owners of SC/ST categories and women entrepreneurs. SMEs engaged in the manufacturing, trading, or service sector can apply for a loan of Rs. 10 lakhs to 1 crore.
Over to you
At Tata Capital, we understand that an adequate flow of capital is necessary for the smooth functioning of any business. To accelerate the growth of your small business, we offer collateral-free MSME loans at attractive business loan interest rates and comfortable loan tenure.Get in touch with us today!