Access to finance is crucial for any business’ development. With more than 50% SMEs lacking access to adequate finances, it is little wonder that a large number of start-ups fail to take off in India. The SME sector suffers also because they are not viewed as an attractive investment opportunity, given the high levels of risk and uncertainty they are perceived to entail, where investors are more concerned about the returns. There are, however, many financial institutions that trust SMEs and their innovative business ideas, providing them attractive loans for business development. Working with a limited infrastructure, SMEs in India also prefer to avoid paying too much in interest, especially for small business loans.
High Interest Rates Lead to Financial Burden
The SME sector is witnessing considerable growth despite the increase in the cost of raw materials, sluggish global demand and tough competition from international players. The only problem is that the reason for which a loan is sought, which is a lack of finances within the enterprise, is counterproductive when the business has to pay exorbitant interest rates. These increased costs could lead to project delays and deferment of required capital expenditure. In some SME sectors, there is no possibility of passing on the increased costs to the end customer. Therefore, such business should consider a proper credit assessment at the time of applying for a loan to minimize this financial burden.
8 Ways to Avoid Paying Too Much in Interest
- Get a Loan based on the Business’ Capital Needs
Much before you start shopping around for a loan, figure out how much money your business actually needs to achieve its goals. It would not be wise to take a loan just because it is available. There are many small business loans in India, especially designed for SMEs. The loan-to-income ratio should fall within your business’ acceptable limit. Otherwise, the interest rates can consume too much of your profit and the company’s other financial goals might get impacted.
- Opt for a Shorter Tenure
Most businesses need short-term working capital to continue their operations. For instance, many retailers require working capital for 2 or 3 months to fund seasonal inventory buildup for Christmas or Diwali sales. In fact, every business, even if it is not seasonal, experiences peak months, when orders are unusually high. It is advisable to keep the loan tenure as short as possible.
- Pay Later Finance
Fintech Lenders offering SME loans in India have come up with a financial product, Pay Later, which carries a predefined credit capacity, unique to each applicant. One of the prominent features is that the borrower can make multiple drawdowns within the given capacity and can repay to restore the balance for further use. The interest will be charged only on the amount used by the borrower and not on the entire credit amount provided by the lender.
- Demand for APR
APR or the annual percentage rate is the amount of interest on your total loan amount that you’ll pay annually. APR takes into account any additional fees and charges that are often hidden in the fine print. A lower APR indicates lower monthly interest payments.
- Say No to Prepayment Penalties
Traditional banks and unorganized money lenders charge a fixed prepayment amount (which is not always transparently disclosed) in case you repay the loan before the said loan tenure. This amount makes it nearly impossible for you to arrange money to pay early. It’s better to confirm with your lender beforehand regarding any penalties on the prepayment of the loan amount. FinTech based money lenders providing SME loans in India, on the other hand, do not impose any prepayment penalties, even if you return their loan just after a month of having received it.
- Avoid Double Dipping
Double Dipping occurs when you refinance your loan with your current funding provider to pay off the balance from the previous contract. But you might not realize that your small business is actually paying double the loan amount in such a scenario. Ensure that you are not unfairly charged for the outstanding portion of your existing loans.
- Don’t Get Tempted by Stacking
Stacking occurs when you add a loan or cash advance product on top of the credit product you already have from a different lender. The end result would be multiple cash advances “stacked”
on top of each other. Business owners often fall for multiple loans or stacking when they’re in a tight spot or want to grab an unexpected business opportunity. However, refinancing your existing debt could increase your overall costs. It increases the financial burden on the business and it becomes nearly impossible to pay off the debt accrued from multiple loans.
- Be Mindful While Being Pitched A Larger Sum
In India, there are lenders who try to upsell small business loans for an amount more than you need. They even try to persuade you into accepting offers too quickly. The offer of additional working capital could be tempting to anyone; however, it is you who needs to determine the right financing requirement for your business.
SMEs in India are effectively contributing to the nation’s economic progress, providing benefits such as job creation, economic multiplication, knowledge spillover, innovations and cluster development. It is thus plausible to get rid of those factors affecting their financial performance, and paying too much in interest is one of them!
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- 8 Tips to Avoid Paying High Interest on SME Business Loans - March 24, 2017