Loans can be classified into short-term, medium-term and long-term loans. Depending on your business requirements, the best choice for you might vary. Before understanding how to choose, let’s understand the various loan terms available:
The various loan terms you can access are:
1. Short-term loans
If you have an immediate need for funds to bridge a cash flow crunch for a few months, then short-term business loans can aid in quick cash infusion. They help ensure smooth operations while boosting reputation management as you can have adequate liquidity to meet your payables on time. These loans do not require much collateral, and the approval process is quicker.
Say there is a mismatch between the timeframe when your income flows in, and you need to meet your expenses. For instance, your employees might need to be paid fortnightly, but customers clear invoices within 60 or 90 days of receipt. Short-term loans like working capital demand loans or supply chain finance can help bridge the gap by gaining access to cash to meet your business commitments.
At Tata Capital, we offer various short-term financing to businesses, from working capital loans to GST bridge loans, customised to meet their unique financial position.
2. Medium-term loans
If you need loans for longer than a year to 3 years to procure assets like furniture and fixtures or laptops and IT systems, medium-term loans will be a good option. Medium-term loans need to be secured by collateral and have a specific end-use predefined.
A medium-term loan is a good idea if you intend to make capital purchases or investments in fixed assets. But make sure that the investment you acquire will generate returns within the loan term. If not, then you might face difficulties servicing the loan EMIs of medium-term loans.
Additional Read: Grow your business with a Term loan in 2021
3. Long-term loans
Long-term loans are generally provided for a period of three to ten years or longer. However, their terms are flexible and can be negotiated. They need to be backed by collateral and have defined terms and covenants for sanction. The repayment terms of these loans are flexibly determined based on your end-use and sanction terms.
If you plan to take over another business or expand your business to newer geographies, these investments take a long term to reap returns. In such cases, long-term loans with flexible repayment terms can help you manage your outflows until the takeover or expansion is complete, settled, and starts to generate revenue.
How to choose the right loan for your business?
Here are some recommendations for selecting the right loan for your business.
1. Evaluate your business
It is crucial to understand the financial position of your business and future needs before making the right decision. It will help if you deep-dived into understanding your current leverage or debt to equity ratio, credit score, revenue growth, profitability, and other critical financial metrics. Additionally, understand your business needs in the coming months and years and what resources you need the most to achieve your goals.
2. Understand the financing gap
Depending on your business aspirations, understand where is the financing gap.
Is it an immediate need for liquidity to keep your operations afloat? If yes, explore short-term working capital loan alternatives.
Is it a gap in procuring simple assets for your business? Then explore medium-term loans.
Is it a gap in procuring long-term investments that are vital for your long-term growth? Then opt for long-term financing options.
3. Consider the cost of financing.
Though interest rate should not be the only determining factor, it is a crucial one. You should pay close attention to it, especially in the case of a long-term loan.
4. Look at the repayment terms.
Consider the loan term, the payment schedule and the other repayment conditions before availing of the loan. Ensure that the terms align with your expected income and loan servicing ability in the coming years.
Additional Read: What is the Difference between Term Loan and Working Capital Loan?
At Tata Capital, our representatives ensure complete transparency so that you are well informed about the payment obligations before signing the sanction letter.
Though there are no cookie-cutter approaches for the same, these are the broad guidelines to choose the correct loan term for your business. Opt for a loan that helps in ensuring smooth business functioning without adding a burden in terms of repayment and loan servicing. If you still have questions, reach out to experts at Tata Capital for more guidance.