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Facts and myths around online business loans?

Facts and myths around online business loans?

There is no doubt that unsecured business funding from a fintech lender is the best option for a small business to obtain an online business loan without the hassles of extensive paperwork. Further, the loan application process has been drastically simplified by the fintech lenders, with adoption of digital technologies. Business loans from fintech players offer benefits ranging from easy EMI repayment options to competitive interest rates, unlike profit sharing terms insisted by investors or a long-drawn loan approval process in banks. However, despite the advantages, there are several myths that are prevalent amongst SME loan applicants. This is also because the fintech industry is a new and rapidly growing sector. Many individuals are apprehensive of new trends. We shall debunk these myths with facts.

Myth 1: In case of lower loan amounts, there is a high chance of rejection

This is complete misinformation. A business should ideally apply for a loan amount as per requirement. Hence the question of low or high does not actually arise. The loan amount sanctioned in entirely dependent upon the business performance and the business needs. The loan approval depends on the satisfaction of the eligibility criteria of the lender.  An SME can apply for a small ticket size loan and get the same approved from an NBFC within 3-5 days if it meets the parameters of being financially strong and creditworthy.

Myth 2: Personal Loan is better than a business loan

This again does not hold in many cases. It is always prudent to separate individual accounts from business accounts. The sanction limit is much lower in case of a personal loan, which might be inadequate for business purposes. The interest rates on unsecured business funding are lower than personal loans. Further, the credit score of the business owner in his individual capacity is considered while granting a personal loan. This does not help build the credit score of the business. It is natural for every business to be subject to business cycles. In case of the business hitting a low, the credit score of the promoter takes a hit, which will impact his/her future chances of obtaining a loan. From the tax angle, interest on business loans can be shown as a business expense deduction in the P&L statement and goes towards reducing taxable income of the business. This benefit is not available in case of availing a personal loan.

Myth 3: Obtaining a business loan is tough

There is a common misconception that it is difficult for an SME to obtain a business loan. This is not true. If one meets the eligibility criteria of the fintech lender like at least Rs 40 lakhs turnover, a decent credit score, submission of GST and IT returns and an operating vintage of at least 3 years, there is a high likelihood of loan approval.

Myth 4: Lenders will insist on a loan against property

This is a common fallacy. In case of banks offering secured loans, collateral cover is mandatory in most cases. In case of fintech companies that extend unsecured business loans, there is absolutely no collateral cover required. NBFCs are well aware that it is difficult for SMEs to offer assets as mortgage owing to their limited asset pool.

Myth 5: It is prudent to use one’s personal savings rather than taking a business loan

This is a huge mistaken mindset. In fact, it is risky to divert one’s personal savings towards business purposes. In case the business fails, one can even go bankrupt personally as one’s personal savings would not be available for future financial needs. One must always maintain separate accounts for personal and business finances.

Myth 6: Banks are best for business loans

There is no such evidence available to validate the above. An SME can obtain an SME loan from an NBFC, even if its loan application has been rejected by banks. In reality, banks stipulate tough conditions for loan approval like a mandatory collateral cover, which is difficult for SMEs to comply with.

Myth 7: The personal CIBIL score does not matter

This is completely short-sighted. A lender is mainly concerned with the repayment capability of the business. This credibility also extends to the business owner as the promoter is ultimately the one who conducts the business operations. Credit score is one of the primary aspects that lenders consider prior to loan disbursement. In case the business suffers loss, the loan amount can be recovered from the promoters.

Myth 8: You need a perfect score to get a loan

This is an exaggeration of the truth. It is true that a decent credit score of at least 700 matters. However, in case of a strong financial position of the business, the lender would consider extending the SME loan to a borrower with an average credit score at higher interest rates to compensate for the lending risk.

Myth 9: Only interest rate matters

This is a short-sighted approach to availing a business loan. While a competitive interest rate can considerably reduce the loan servicing costs, the loan amount and tenure are also of significance. Factors that impact the loan cost include hidden costs, processing fee, documentation charges and reputation of the lender.

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