Cash flow nightmares? Cyclical loans are your business lifeline
31 Jan 2025

Cyclical business loans are financial tools created to help businesses navigate the challenges of economic cycles.

In India, these loans are key for companies to maintain cash flow during times of unpredictable demand.

By ensuring access to capital during revenue dips, companies can continue operations, capitalize on growth opportunities, and position themselves for success when the market rebounds.

The basics of cyclical loans
Fundamentals

Cyclical business loans are designed for industries with seasonal patterns, where demand predictably rises and falls at different times of the year.

For instance, a retailer needs extra cash to buy inventory before Diwali or Christmas.

These loans have flexible repayment schedules that match a company's cash flow, allowing for smaller payments during slow periods and larger payments when revenue is high.

Eligibility and application process
Getting started

To be eligible for a cyclical business loan in India, businesses need to establish a well-defined pattern of seasonal sales cycles.

Lenders will analyze past sales data, profit margins, and cash flow statements.

Applying requires submission of comprehensive financial records and a business plan detailing how the loan will be utilized to maximize opportunities during high-demand periods.

Interest rates and fees
Costs involved

Interest rates for cyclical business loans are determined by the lender's evaluation of risk, which considers aspects like credit history and the predictability of cash flows.

In general, you can expect rates between 12% and 18%.

Plus, don't forget the processing fees, which can go up to 2% of the loan amount.

Businesses should always shop around and compare offers from different lenders to get the best deal.

Repayment schedules tailored to business cycles
Flexibility

A key advantage of cyclical business loans is their flexible repayment schedules.

Lenders often allow borrowers to make lower payments or even pause repayments during lean months.

This flexibility is essential for maintaining liquidity without straining the business's finances during downturns.

However, it's important for businesses to exercise prudence in managing this flexibility to avoid accruing unnecessary interest over time.

Tips for managing cyclical loans effectively
Best practices

To make the most of cyclical loans, anticipate busy periods and determine additional funding requirements in advance.

Invest the loan amount in high-return opportunities during periods of increased demand.

Preserve earnings for structured repayments.

Continually assess and refine your borrowing strategy based on financial outcomes. This way, you can achieve growth and stability throughout economic cycles.