Business credit/loans can be vital in ensuring the exponential growth of a business or in helping it achieve its goals. These are, more often than not, used to cover a whole host of vital expenses, from funding basic operational costs to hiring the right set of people. However, while credit can be immensely helpful, it also comes with serious responsibility. There can be many benefits of opening a separate line of credit for one’s business, provided one knows how to make effective use of it.
Ahead of applying for credit, one must seriously consider everything, from their own ability to repay to their lender’s ability to help in the growth of the business by being a partner rather than just being a money lender.
Here are 10 important considerations to keep in mind before initiating a credit line for your business:
- Assessing the requirement of funds
Have an in-depth understanding of your business expenses and its income generation capacity. Lenders want to know what the credit will be utilized for. Keep in mind your business’ circumstances and expected monthly cash flow. Mapping these requirements will help both the lender and you judge whether extending this credit towards the business is a good idea. It will also help you assess what credit limit will be viable.
- Assessing the timeframe of fulfilling that requirement
“How long will this credit last and will it fulfill the requirements that it was intended for”, are two questions to answer before applying for credit. The answers to both of these can be found by working on a concrete business plan and ensuring that you currently have enough cash flow to make repayments on time, for both principal and interest repayments.
- The credit score of the business and owners
An individual or an organization with a bad credit score will always find it harder to access credit. Bad credit history will have a direct impact on interest rates offered. If you are applying for credit, it is important to check both your and the business’ credit score. It is equally important to check if this credit score is lower than the industry average threshold (e.g.: 700 for CIBIL), and to work on improving it before applying.
- Hard pull vs soft pull of credit scores
There are two types of credit inquiries. Both can impact the credit score and subsequently the availability of credit. Hard credit checks are done when a lending decision is being made, whereas a soft credit check is done as a part of a background check, to see if a business qualifies to get certain offers. Don’t be afraid of the hard pull, just make sure to keep a regular eye on your credit score and continually work on improving it.
- Hidden fee structures
There is a big difference in fees between personal vs business credit. It is important to go through the fee structure with a fine toothed comb and see the repayment schedule in detail. Often, there are hidden charges in the fine print that can have a drastic impact on the repayment amount — such as charges for early repayment. Knowing the detailed fee structure will also help you make an informed comparison of options offered by different lenders.
- Interest rates
Different lenders have different credit schemes, and the interest charged can end up being quite different. It is important to check the following before taking on any debt:
– If there is a balloon payment at a set date that you may not be ready for
– If the interest is going to amount to a significant chunk of the premium for the period of the credit
- Pre-closure fee
An important point to clarify with the creditor is if the credit facility involves any pre-closure fee. A pre-closure is basically paying off the debt before the end of the loan tenure. Certain lenders levy a penalty for pre-closure, but that may still be lesser than the burden of accrued interest.
- Nature of credit: loan vs revolving credit line vs overdraft
When the nature of the credit changes, the interest and repayment terms are also impacted. It is important to select a credit type that suits your business needs. Depending on the allocation of funds and the nature of the business, you can decide which type of credit works best meets your requirements.
- Quality of customer service
It is important to work with an organization that understands and respects the value of your time and business. Good customer service from your lender can help you work more effectively towards your business goals. It will also ensure that your time is being spent in the most effective manner possible, while minimising time wasted on tedious and easily avoidable administrative issues.
- Top-up services — business tools/consulting/top-up loans
Getting the right lending partner can give a lot of confidence to the business and give you the support you need to grow to your full potential. A lot of lenders offer auxiliary services such as consulting on specific subjects, equipping the business with the right tools to grow, and also providing quick top-ups for extension of credit lines for any major expenses. It is important to find a credit partner who will understand your goal and help you reach it.
Credit is easy to get, but it’s hard to get right
Do your research before settling for a lending partner, because everyone’s circumstances can be quite different and there is no “one-size-fits-all”. Don’t let the lack of credit be the reason you don’t fulfill your dreams. Once you have a handle on all of the pointers mentioned above, you will have a clear understanding of the financial needs for growing your organization. This will help you to find the best match for your business.