Business loan tips

There are other conditions involved with a term loan that need to be met. This includes some service charges that might have to be paid, depending upon the position of the borrower as well as the condition of the term loan. These are the charges that are involved with the working of the loan and hence need to be paid.

At the same time, if there is an asset that is pledged for security and is involved in or is part of the loan then it should have an insurance policy. This will cover any loss to the asset so that the bank is not left without holding any amount in its hands. In case of many fixed assets, there has to be a fire insurance policy while other assets might additionally require a comprehensive coverage.

There is a requirement of funds for every business, and it is the effort of all the people involved in a business that can get the best terms possible for the borrowings. This will mean a lower rate of interest on the amount borrowed plus a higher amount of loan from the bank. Even relaxation in the conditions will be good for borrowers in their business. Banks on their part also look at several conditions before agreeing for a term loan. Some of the common conditions that are considered include:

* Regular repayment history if existing customer
* No defaults in past loans
* Existing relationship with the borrower
* Strong performance record in terms of profits or turnover
* Improving financial condition
* Credit rating if loan greater than a specific amount
* Internal credit score

The borrower will be charged an interest rate based upon his/her position. There is a specific bank rate known as the prime lending rate (PLR), to which all the advances are usually linked. There will be a premium or a discount to this rate. If it is a top-rated borrower like a company that has a triple A rating then the overdraft might be available at a discount to the PLR. As the credit quality of the borrower worsens the premium over the rate goes up, which means the overdraft will keep getting costlier. Another factor that plays an important role in determining the interest rate is the relationship of the borrower with the bank. Good customers who have a longstanding relationship with their bank will also get a reduced rate that is applicable to them.

The key part in the entire overdraft facility is the extent of security that is taken by the bank. There are various limits based upon the security that is being offered and banks will make sure that their position is adequately protected because this is required in case the borrower does not pay back the amount. The percentage figure for security will vary widely, depending not only upon the bank involved but also the nature of the security.

The percentage can range from a high around 90% for several kinds of deposits and bonds to a figure of around 60%-70% when it comes to debt-oriented mutual fund. If there is some fixed asset that is involved then the figure can dip further, even less to around 40%. This shows the extent to which a borrower will be able to get the overdraft for the extent of security that is provided.

The normal charge associated with an overdraftis the interest cost that arises due to the usage of the credit facility. But apart from this charge there are other costs that a borrower may need to take care of. This is in the form of processing fee that is levied when the overdraft is actually sanctioned. This fee is to be paid once and is usually around 1% of overdraft limit. This way a bank seeks to recover the cost incurred by it in carrying out the entire processing of the facility from the borrower. In many cases, the bank even waives this cost or reduces it significantly, resulting into a savings for the borrower.

The key part of the overdraft facility is the manner in which the interest is calculated. This becomes a good facility as far as low cost funds are concerned because a smart business will ensure that it does not have a high cost in the usage of credit facilities. There are a few factors that lead to this position for the borrower.

The interest is charged on a daily basis, which means the borrower will be charged interest only for the time period for which the account is used for drawing an extra amount. In most cases where there is an existing current account the overdraft facility is added on to this so that the same account can be overdrawn till the limit. There is no fixed period for which the interest cost will be levied, and the earlier the amount is available for the business the faster will be the clearing off the balance outstanding in the account, which will lead to the reduction in the cost.

By its very nature the cash credit facility is a short-term facility. There is a fixed limit that is issued as cash credit, so the borrower knows the amount that is available to him/her. This limit is usually present for a year after which the figure will be reviewed. The review process is nothing but the proper check of the various documents related to the business over the period of the year. Once it is clear to the bank that the business is expanding and the repayment record is also good then a higher limit will be made available. This will introduce more funds for the business that it can use to tackle the higher requirement of funds.

The cash credit limit review is a very important process because a deteriorating financial condition of a business will immediately lead to the restriction of the use of the funds. There can also be a squeeze in the form of a lower amount available for the security that is maintained or a rise in the interest rate charged. This can raise the cost of funds as far as the business is concerned, pushing up the entire cost of activities. Hence, a proper tackling of the review process is important to ensure that the facilities are continued smoothly.

There are specific purposes for which a cash credit facility can be extremely useful. One of the main reasons why businesses require funds is to meet the short-term expenses incurred by them. Cash credit facility is one of the best routes available to finance these expenses. The reason is there is no fixed time period when the payment has to be made and the business can pay off the money when the required cash is available and ready for payment.

An expanding business will also find the cash credit facility very useful because with its help the entity can expend the funds made available through this route in a systematic manner. The cash credit requirements usually call for regular submission of documents tracing the path undertaken by the business. This kind of monitoring ensures that when a business is expanding, it is immediately come to the notice of the financing institution and that the facility is then provided to the entity to tackle the position.