A
business loan in Sri Lanka is a financial product that is designed to
provide capital for businesses. All types of businesses, from startups, to
small businesses and even large enterprises, avail business loans from banks in
many different forms, through standard or SME banking in Sri Lanka. They
help companies cover various expenses, such as expansions, purchasing
equipment, managing cash flow, or even funding new projects.
Understanding
all aspects of these types of loans is crucial for entrepreneurs and business
owners as they navigate the complex avenues of growing and sustaining their
businesses.
Type
of business loans
1. Term
loans: These come mainly in two types.
·
Short-term loans: These
generally have a repayment period ranging from a few months to a few years.
They are used for immediate financial needs or to fund short-term projects.
·
Long-term loans: The
repayment periods for these extend over several years, usually around 20-25
years. These are best for significant investments such as purchasing real
estate or expensive equipment.
2. Lines
of credit: This is very much similar to a credit card. The bank will approve a
maximum credit limit for the business, and they can draw funds as needed for
expenses using their corporate bank account. They will pay interest only
on the amount that they have used or borrowed. These loans are useful for
managing cash flow fluctuations.
3. Equipment
financing: With this type of finance option, a business can purchase much
needed equipment for their operations. Usually, the equipment itself serves as
collateral for the loan, reducing the risk to the lender.
4. Invoice
financing: These allow businesses to borrow money against outstanding invoices,
and are also known as accounts receivable financing. It is a way to improve cash
flow by getting funds upfront instead of waiting for customers to pay.
5. Import/export
financing: Those involved with import and export businesses can avail these
import/export facilities, which they can use to order goods from
overseas or for exporting goods elsewhere.
Purpose
of getting a business loan
These
types of financing can help businesses to cover various expenses, such as:
·
Startup costs: New
businesses often require significant upfront investment for things like market
research, product development, and marketing efforts at the initial stages.
These types of financing can help them get the necessary capital to get
started.
·
Expansion: When
established businesses are looking to grow, they may need funds to open new
locations, hire additional staff, or enter new markets. Loans can provide the
resources they need to support this growth.
·
Equipment and inventory:
Purchasing new equipment or stocking up on inventory can be costly. With
financing, these large expenses can be managed, without depleting cash
reserves.
·
Cash flow management:
Seasonal businesses or those with irregular cash flow can use borrowings to
cover operational expenses during slow periods.
·
Debt refinancing: Businesses
with existing high interest debt might look at the option of taking out a new
loan at a lower interest rate to refinance and reduce their overall debt
burden.
Benefits
of business loans
Getting
a loan such as this can benefit a business in many ways, including:
·
Access to capital: It
gives a business access to funds needed to grow or sustain itself. Without
external financing, many businesses would struggle to grow or even sustain
themselves.
·
Flexible options: Since
there are various different types of loans available, businesses can choose
options that best suit their needs. Whether it is a long-term loan for major
investment or a line of credit for short-term cash flow management, there is a
solution available for every situation.
·
Build business credit:
Successfully managing and repaying a business loan can help build the business’
credit profile, making it easier for them to secure additional financing in the
future.
·
Ownership retention:
Unlike equity financing, where business owners sell a part of their company in
exchange for capital, business loans allow owners to retain full control and
ownership of the company.
Risks
and considerations
While
business loans offer many benefits, there are also certain risks involved and
considerations to make prior to applying for one. These include:
·
Debt burden: Taking on a
loan means committing to regular repayments, which can turn out to be a burden
if the company’s revenue does not grow as expected. Failing to make the
repayments, can result in default and damage to the business’ credit rating.
·
Collateral requirements: Business
loans may require collateral, such as property or equipment, and if the
business fails to repay it, they risk losing these assets.
·
Interest rates: Depending
on the type of loan, the interest rates charged could be high, increasing the
cost of the loan and the burden on the business.
·
Qualification
requirements: A company would need to have a strong credit history, a solid
business plan, and sometimes even personal guarantees from the owners in order
to secure a facility.
·
Impact on cash flow: Loan
repayments can make a significant impact on the cash flow, especially if the
revenue earned is lower than the amounts being paid. Carefully assessing the
company’s ability to make these payments is crucial prior to applying for one.
How
to apply for a business loan
Step
1:Prepare a business plan: A detailed
business plan that outlines goals, revenue projections, and how the monies will
be used is vital. Lenders want to see whether the business has a clear plan for
growth and repayment.
Step
2:Review credit history: Both the
businesses’ credit history and those of the owners will be reviewed by the
lender. Hence, it is important to address any issues or inaccuracies prior to
applying.
Step
3:Gather financial statements: You may need
to submit several years’ financial statements to the lender, including income
statement, cash flow statements and balance sheet.
Step
4:Determine loan amount and type: Have a
clear understanding of how much funding is required and which type of loan best
suits the needs of the business. It is also important to consider the terms of
the loan, including interest rate and repayment schedule.
Step
5:Shop around: Different lenders will offer
different terms; hence, it is important to compare options before making a
final decision.
A
business loan can be a powerful tool for a business’ growth and sustainability,
providing the necessary capital for a wide range of needs. However, it is
important to carefully consider all aspects of the loan, including type,
interest rates, and repayment terms, as well as the purpose for borrowing and
the risks involved, before making a decision.
The Wall