7 Tips for SMEs to Better Utilize Business Loans

The non-availability of easy loans has always been a major constraint for the growth of the SME sector in India. However, with the recent increase in the number of the FinTech lenders, 2017 is expected to bring ample customized loan for SME in the nation.

Absence of collateral, bad financial statements and the inability of financiers to service requirements for small loan amounts are the major hindrances for small businesses approaching traditional banks for working capital loans. On the other hand, FinTech based lending companies analyze the creditworthiness of the borrower using various analytics and assessment metrics, which include the firm’s sales and fulfillment records. These alternative lenders then disburse loans in less than 72 hours.

Although getting a loan has been made easy, thanks to FinTech, most SMEs might fail to optimally utilize that loan amount to their benefit. Firstly, SMEs need to borrow only what they need, after examining what they can expect to repay. 

1. 7 Tips to Utilize Small Business Loans in India

Most SMEs assume their future to be all set once they've got funding, whether they get it from a traditional bank or through an alternative lender. It is true that these funds help businesses to achieve goals, make necessary changes and continue the growth process. However, before approaching a lender for funding, a well-thought-out plan is necessary to evaluate the efficient usage of the loan amount. You should know that managing your business loan well would improve your credit rating and help you to borrow more in the future.

1.  Avail the Business Loan in a Separate Account

It is strongly recommended to place the loan amount in a different account and not in your primary business account. Absence of loan amount from company's main bank account will prevent you from overspending, since transferring money from one account to another could be daunting task for many. This will help you to think long and hard before choosing to utilize the money. 

2. Stick to a Budget

Spending according to a budget will help you well manage your loan amount, since you'll always have an idea as to where you are spending the money. Those who find it difficult to create a budget on their own can consider saving as an alternative form of creating funds. This can be done by prioritizing expenses and reducing unnecessary expenditures. Hiring a professional to allocate and manage the funds could have an immediate impact on costs, but may yield long-term rewards. 

3. Don't Misuse the Capital 

It could happen that after taking the business loan, the owner might ignore the main purpose of borrowing the funds and channel the funds towards other business expenses. To make wise use of the money, stick to a plan. Doing otherwise might affect business operations and supplier relationships.

4. Avoid Utilizing Funds for Personal Purposes

A loan can take care of a lot of things and small expenses; however, it would not be wise to spend on every expense that comes your way. Never use the loan amount for any personal expenses or paying off an existing debt. Before you realize, you might end up being short on cash once again. The best way to manage this influx of cash is by creating good operational controls. Checks for cash monitoring and authority for fund release should be handled by someone else, like an accountant or financial manager. 

5. Never Miss a Loan Payment

The rule is to stay on top of payments whenever it comes to repaying EMIs. Borrowers need to be disciplined about repaying the loan, without missing even a single EMI payment. This is highly important to maintain your credit history. The fact is that another big opportunity or financial problem can present itself in the future and this bad credit history can compromise the chances to availing a new loan in future. 

6. Keep Your Lender Informed

Hiding things from the lender may look like an easy option. However, it is strongly recommended to inform your lender about all the major happenings in your business, which should also include sudden changes in revenue. Even if you are finding it hard to make monthly loan payments, be honest and up front about your situation. This kind of communication will establish a sense of confidence in the lender about you. Your lender could do something about it as they often have that flexibility, where they can restructure your loan. 

7. Pay Back Whenever You Can

This is especially applicable for the line of credit loans for SMEs in India, which allow the applicant to make multiple drawdowns within the given credit capacity, giving them the opportunity to repay the amount to restore the balance for future use. Anytime your business enjoys a sudden windfall, don't forget to pump in that extra money into your loan account. This will ultimately reduce your liability. You can pay the EMIs of a term loan in a different way, where you put the money or the profit in a savings fund and use this fund to pay the EMIs when finances are tight.

FinTech lenders usually do not levy any prepayment penalty. If you want to pay off your loan earlier than the stipulated period, the lender would gladly comply in closing your small business loan.

About This Author

Sandip Gupta Joined: April 26th, 2020