How to decide on a loan for business?
By Vaibhav Aggarwal
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Nowadays, lenders offer a wide variety of loans to choose from. As a businessperson, one has to consider some basic features of a loan before deciding whether the loan is apt for the business.

Some of the features a business loan should possess include:

Low interest rate: This is a feature everyone looks for while considering a loan. A businessperson has an option of a daily or a weekly loan provided by local lenders. However, the rate of interest in such a loan is as high as 3 percent per month.

Besides this, a lesser amount is provided due to advance payment of installment. For a loan of Rs 1000, a local financier would lend Rs. 900, Rs. 100 being the advance EMI, and charge interest on the entire amount of Rs. 1000. This increases the interest payments enormously.

The cheapest loan a business person can avail is loan against property (LAP). The current LAP rates hover around 10 percent. A cash credit or a bank overdraft facility carries rates ranging from 11-13 percent, depending upon the turnover of the company, the quality of collateral and the type of business.

A personal loan is an expensive loan since it is an unsecured form of loan. Usually the interest rates applicable to personal loans vary between 16 and 18 percent but in some cases the rate could be as high as 24 percent.

Low cash outflow

Another factor that needs to be considered while opting for a business loan is the cash outflow. The minimum cash outflow is possible from the bank overdraft facility since only the interest needs to be paid regularly and that too on the amount used.

A project based term loan is also appropriate if payment deferment clauses are attached to it. This is apt for Greenfield (totally new plant) and brownfield (expanding an existing plant) projects.

A personal loan may result in a huge cash outflow. However for a start-up/new business this may be the only option better than approaching a local financier.

The ideal way to finance a start-up business is to avail a loan from family or friends at zero or very low interest rates.

A gold/jewel loan is also meant for financing new businesses. Such loans carry an interest rate of 1-1.5 percent per month. The only drawback in gold loans is that the amount of loan is about 60 percent of the value of gold.

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