As a small business owner, you need to be aware of all financial solutions available for you to use. As an SME, you can apply for a business loan to cover your business’s financial needs, but there are many things to consider when applying for a business loan. These include which lender to apply with, what amount to ask for and for what duration, and how to use the loan. Based on your needs, you can either pay your loan over a short period or accept a long-term tenor for the loan and have more time to repay it.
Scroll down to find out why a long-term business loan may be a good option for your business’s financial needs and growth.
What is a business loan tenor?
The period in which you repay your loan will be your loan tenor. It starts from the date the loan is disbursed to you to the date you pay your last loan EMI instalment.
You need to repay a portion of your loan each month on a set date decided in advance. Your monthly loan instalment or EMI is the sum of a portion of the loan amount and the interest charged by the lender. The loan amount to be paid in each EMI payment is calculated by dividing the loan amount by the tenor.
For example, you take a business loan of Rs.10L, and your loan tenor is 2 years (24 months). Your monthly instalment will be Rs.10L divided by 24, which comes to Rs. 41,666 plus interest. Whereas, if your loan tenor is 12 months, your monthly instalment will be 10L divided by 12, which will be Rs. 83,333 plus interest. Therefore, your EMI amount due every month is higher when you have a shorter business loan tenor, and the amount decreases when you get a long-term business loan.
Why is a long-term business loan the better option for my business?
When you apply for a small business loan, lenders analyse your business documents, financials and credit history to check your loan eligibility. If you have taken a loan in the past or are currently repaying a loan and you have successfully paid all your EMIs on time, it shows lenders that your business is financially stable and your business has enough cash flow to repay the loan within the set loan tenor.
If you are regularly unable to repay your business loan EMIs on time, you are charged the EMI bounce charges, and your lender begins to doubt your creditworthiness. Therefore, you must keep track of when your EMIs are due and ensure you have enough cash in the bank to repay them.
As an SME, you have various financial obligations. Here are some tips to help you remember to pay your business loan EMIs on time.
One tool to help you keep up with your EMI payments is your loan tenor. The repayment period of your business loan may help you manage your finances better and pay your EMIs on time. A long-term business loan with a slightly higher loan tenor may be a good option for you. Here’s why:
1. Purpose of the business loan:
A long-term business loan is a right choice if you plan on expanding your business or purchasing some high-value business assets. Since such investments take a few years to turn a profit, paying less in EMI dues every month for longer is a better option because you can stretch the limited financial resources you have right now further with a longer tenor.
2. Size of the business loan:
Your business loan tenor also depends on the size of your loan. If you’re getting a smaller loan amount, Rs. 3L, for example, lenders will offer you a shorter loan tenor that will help you repay this loan faster and build your credit history. If, instead, you’re taking a business loan of Rs. 25L, the lender will offer you a longer loan tenor allowing you to repay the loan amount slowly over more time.
Once your loan repayment period is determined, you can calculate what your EMIs dues each month will be and plan your finances according to your cash flows, so you are comfortably able to repay the loan, fund your business expenses as required, and build your savings.
3. Amount of interest owed to the lender:
A portion of your loan EMI is the interest your lender is charging for the business loan. So, when you get a business loan, you need to be aware of the interest you will owe your lender in addition to the loan amount.
Depending on whether you get a short-term or a long-term business loan, the interest amount you pay the lender will vary. If you borrow the money for a shorter time, you’ll end up paying the lender lesser interest at the end of your repayment period. With a long-term business loan, since this is a much longer relationship and you’ll be paying more monthly instalments, you end up paying more in interest.
That being said, a longer loan repayment period gives you the time needed to successfully and profitably expand your business without constantly worrying about the loan EMIs due every month.
4. Financial ability to repay the loan :
One of the most important factors to consider when taking an SME loan is your business’s financial stability and cash flow.
As an established business, you enjoy a certain level of financial stability, and you have a thorough understanding of how much EMI expense your business will be able to take on. While this ability may increase as your investment starts to pan out, do not consider that when you’re calculating what EMI amount works for you. If, based on your calculations, you decide your business should repay the loan in smaller instalments, you can go for a long-term business loan to avoid the additional financial stress of high-value EMIs. But, if your business is flourishing and you have a steady cash flow, you should go for a short-term loan.
When you apply for a small business loan with CreditEnable, a part of our mission is to help you better understand the loan underwriting process. So, we partner with India’s leading SME lenders and work with them to ensure you don’t miss any important information during the loan application process and that you get hassle-free business funding. We aim to enable small business loans that are most suitable for our SME customers. That’s what we do every day, and we may be able to help you too!
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