Loans are a legitimate means of funding any venture. This holds true for almost every business. If you want to start a business or expand a running business you will need funds. When you commence a business, you can use the funds from a loan to set up the business. Often, due to the vagaries of the business, you will find sudden spurts in demand necessitating quick infusion of funds to meet the increased demand. Other times, you will need to buy new machinery or upgrade your existing machinery. At these times, loans come in handy to help you meet the need of funds quickly.
There are different types of loans such as personal loans, home loans, business loans and car loans. Choosing a business loan over a personal loan is the best option when it comes to meeting the expenses required for your business.
The reasons for choosing a business loan from the available choices are several and they include:
Maintenance of separate accounts
Separating the accounts of business from other accounts is crucial for submitting financial statements to statutory authorities for purposes of GST, TDS and Income tax. A business loan helps to account for the source of funding related to the business. It helps to maintain the identity of sources of funds for business expenses. If you mix up with other fund requirements not related to business, you may find it difficult to explain to the relevant authorities.
Helps manage the business efficiently
Often, you tend to mix up accounts by drawing on the business finances to meet personal expenses. Similarly, you may tend to use personal funds to finance business without proper accounting. This distorts the financial indicators of your business and you may not know the real financial health of your business. A business loan helps to maintain the business identity enabling you to run the business more efficiently.
Helps maintain a healthy credit score
Credit bureaus keep track of loans based on information fed to them by lenders. Lenders feed information based on the nature of loan – business loan, home loan, car loan or personal loan. They report a ‘credit score’ for loans of a personal nature and a ‘company credit score’ for business loans. If you mix up these loans and use funds meant for a specific purpose to meet expenses for another purpose you tend to mess up the credit scores if you default on any of the loans.
Maintain integrity of savings habit
If you tend to use personal funds for business, you tend to draw money from the business for personal expenses upsetting the cash flow of your business. It is better to maintain the integrity of your savings habit by not drawing from personal funds to help finance your business. Instead, you can avail a business loan and use the funds for business purposes only.
Helps account maintenance
When you maintain a separate account for your business, you are helping yourself immensely because you can avoid mixing up accounts with other expenses not related to business. It saves you effort and time to separate these when the time comes to finalize accounts in preparing the P/L account and the balance sheet, which are necessary for determining the profits from the business before submitting your ITRs.
Use the strengths of your business
Typically, you can avail a business loan purely on the merits and strengths of your business. If you are running your business efficiently, you can avail a variety of loans under the business loan umbrella. For instance, you can avail a machinery loan when you want to replace old machinery or buy new machinery. You can take a working capital loan if you find yourself short of funds for meeting a large order. You can take a business loan based on the receivables from your business.
Avail business loan only when your business can repay
Many times, you tend to use personal funds without evaluating the consequences of such funding. It is better for you to carefully evaluate the need for funding using the various facilities available on the websites of lenders such as Tata Capital. For instance, you can use the business loan EMI calculator and input the parameters including the business loan interest rates and find out whether you can afford the EMI. When you do such an evaluation, you can then bargain with the lender to reduce business loan interest rates for the business loan you intend to avail.
It is imperative that you maintain the integrity of business by being scrupulous in separating the accounts of the business from other accounts. This applies more to business loans so that you are single-minded in your focus on the business and not confuse with other stimuli.