Choosing Between Bank Business Loan and Selling a Plot of Land for Startup Funding
Choosing Between Bank Business Loan and Selling a Plot of Land for Startup Funding
Entrepreneurs face a critical decision when starting a new business: should they seek a business loan from a bank or sell a plot of land to fund their venture? This decision is influenced by various factors such as eligibility criteria, income potential, and market conditions. Below, we analyze both options to help aspiring business owners make an informed choice.
Eligibility Criteria for Business Loans
When applying for a business loan from a bank, the primary requirement is to meet the eligibility criteria set by the lending institution. These criteria vary from bank to bank and are generally based on factors such as credit score, collateral, income, and the proposed business sector. Here's a detailed look into what banks consider when evaluating loan applications:
Educational Qualification and Credit Score
One common misconception is that a high educational qualification is required to secure a business loan. In reality, the primary factor is the ability to manage financial risk. Graduates might have an edge, particularly under government-sponsored schemes, but it is not the deciding factor. Banks primarily assess the credit score, which reflects the borrower's past performance and reliability in managing financial commitments.
Income and Project Viability
In addition to credit score and educational background, banks extensively evaluate the income of the borrower and the viability of the proposed business project. A strong credit proposal, supported by relevant financial documents, is crucial. The project should not only appear feasible but also demonstrate a logical and practical approach to income generation and repayment of the debt. If the bank feels the project is non-viable, the loan application is likely to be rejected.
Bank Rejections and Scrutiny
Banks often reject loan applications when they find that the borrower is ineligible or the income is insufficient, and the credit track record is poor. Furthermore, even if the project seems viable on paper, banks may still reject it due to an unfavorable market condition or unattainable projections. For instance, if the proposed income is exceptionally high, it is scrutinized rigorously to ensure its logical and practical viability.
Current Market Conditions and Bank Rate Reductions
The banking industry is currently under immense pressure due to low interest rate environments and reduced term deposit rates. Banks are not able to lend at the same high rates they used to because the genuine borrowers are hesitant to take credit due to the uncertainty of profitability. As a result, banks are also lowering their interest rates to attract prospective borrowers. Despite this, stringent scrutiny remains due to the accountability of lending officers for future non-performing assets (NPAs).
Why Selling a Plot of Land is Sometimes Better
When the break-even point is far out or the interest on the loan would consume all profits, it might be better to sell a plot of land to fund the startup instead of taking a business loan. Here are the reasons why this could be a more viable option:
If the project's break-even point is distant, securing a loan might not be the most prudent choice, as the interest payments could consume the profits. Selling the land can provide a steady and growing source of income, which is more predictable than the uncertain profits from a new business. Additionally, over time, the income generated from the land can become substantial, making this a more secure financial route.
Conclusion
Choosing between a business loan and selling a plot of land for startup funding depends on several factors, including the project's viability, the bank's scrutiny, and market conditions. While a business loan can provide much-needed capital, it requires careful evaluation of the project's profitability and repayment capability. Selling a plot of land, on the other hand, can offer a more stable and predictable financial foundation, especially when the projected income from the business is uncertain. Entrepreneurs should weigh these options carefully and seek professional advice to make the best decision for their startup.