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Tata Capital > Blog > Loan for Business > The Pros and Cons of Business Loans for Clothing Business

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The Pros and Cons of Business Loans for Clothing Business

The Pros and Cons of Business Loans for Clothing Business

Mark Twain said, “Clothes make a man”. People today put a lot of thought into their clothing and the message it conveys to the world. Thus, clothes not only reflect a person’s taste but also say a lot about their personality. This is probably why running clothing businesses can be tricky. What one person calls beautiful could seem weird to another. You have to take objective calls on designs and collections that will be judged subjectively by each of your customers. But that’s not all. You also have to take financial decisions that can significantly impact your business at multiple levels, with the most important decision being how to fund your business.

There are various ways to fund clothing businesses. You could get a small business loan, onboard investors, or sell equity: the options are endless. So how do you decide? Often the best thing to do in such situations is to break things down into simpler chunks. For example, coming up with a pros and cons list.

In this blog, we’ll look at the pros and cons of a small business loan to set up a clothing business.

Pros of a business loan

1. Retention of ownership

When you apply for a business loan, the lender will ask you for an elaborate business plan. Only if they approve the plan will they sanction your loan. But once your loan is disbursed, the lender will not interfere in your business, as long as you pay your EMIs on time. You get complete authority over every decision, be it creative, strategic, administrative or financial.

Retention of ownership also means you are entitled to the entirety of your profit. No one can claim it. However, this is not the case when shareholders or investors enter the picture.

2. Variety of options

There are many types of business loans. Based on your requirements, you can get a working capital loan, a machinery loan, or an SME loan. Further, you can choose if you want this loan to be a term loan, where you pay a fixed EMI for the loan tenure or an overdraft loan, where the interest is calculated only for the amount used.

3. Flexibility in repayment

With a business loan, you can choose a tenure and EMI option that works best for you. Most financial institutions offer customized EMI programs that are flexible and better suited for clothing businesses where the income is not consistent every month.

4. Availability of funds

A business loan can make large sums of money available to you very quickly. The best part is you can even get a small business loan without any collateral. Getting a loan is the easiest way for small businesses to raise a large amount of funding.

5. Tax benefits

One of the biggest business loan benefits is tax exemption. You can claim tax deductions on the interest you pay on your business loan. This is a blessing for entrepreneurs struggling with business expenses and EMI payments.

Cons of a business loan

1. Extensive application process

Financial institutions don’t just hand out loans to anyone. Since we are talking about large amounts of money, small business loans involve an elaborate and rigorous application process. You must provide extensive documentation to prove they can trust you with the funds. Some of the documents you may need are:

  • Trade license for business proof
  • Identity proof
  • Certified bank statements
  • Financial statements of your business

In addition, you will also have to give them a detailed business plan, outlining your long-term and short-term goals, explaining how you plan to use the loan amount and, more importantly, how you plan to pay it back. This plan has to be backed by accurate projections and numbers. Moreover, with some lenders, you may also have to give a short presentation.

2. Higher rate of interest

Small business loans tend to have a higher interest rate. Even more so when the loan is unsecured. If you’re unsure of how much money you will need, you must choose the loan type carefully, as you may end up paying interest on the money you may not even use.

3. Risk of default

Most small businesses cannot claim a steady income, and clothing businesses are no exception. But a liability like a loan requires consistent monthly payments. If your income for a particular month is not sufficient to meet your expenses, specifically your loan EMI, you could default on your loan. Without proper financial planning, the risk of default could be high and adversely affect your credit score.

Evaluate your business needs

Being prepared with data is a great way to tackle any problem. The same goes for deciding on a business loan. To know which loan type would suit you best and how much money you will need, you need to evaluate the needs of your business.

If your clothing business is already in operation, perform a gap analysis to see what you need to make it more successful. It could be a need for marketing, better displays, more staff, more collections, etc. You can also get feedback from your customers to know what needs work.

Once you know why you need the money and how much, it will be much simpler to decide on the kind of loan to opt for.

Assess your loan options

There are different borrowing options available in the market for clothing businesses. Lenders usually offer loans as overdraft loans or term loans. There are also many specific loans like machinery loans, SME loans, working capital loans, etc.

While different options have different business loan benefits, you can decide on the loan’s type, amount, and tenure based on your expected timelines for the expenses.

Prepare your application

Once you’ve decided on a lender and the loan terms, start preparing your loan application. The application must tell the lender that you know what you’re doing. It must make the lender trust you.

For this, you will need a comprehensive business plan that is well-researched, thorough and backed by numbers. You will also need to submit many financial documents like your company’s balance sheets, profit and loss statements, tax returns, cash flow statements, and accounts receivable and payable documents.

These documents will give your lender a clear picture of your business’s financial health and your ability to manage your business. These and your credit score are important factors that can make or break your application.

Start your business seamlessly with Tata Capital

Getting a business loan for your clothing business is no simple task. It involves carefully examining various elements and choosing an option that works best for you.

At Tata Capital, we offer different business loans like MSME/SME loans, machinery loans, loans for women, and more. You can even choose if you want an overdraft or a term loan. With Tata Capital, you can enjoy competitive rates, minimal documentation, and flexible EMI programs.

So what are you waiting for? Call us or visit our website today to learn more about our business loan options!

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