Business loan plays a vital role in managing the cash flow and helps to meet the working capital requirements of an entrepreneur or enterprise. Irrespective of the size of your business, chances are that at some point of your business tenure you shall require capital for business expansion or related activities. Business loan is not a kind of financial product which is taken frequently by business owners or enterprises. Being an important financial decision, you should avoid common mistakes while applying for a business loan.
No one likes to receive a loan denial letter from the lender due to common mistakes, lack of information or ignorance. Therefore, let’s get familiar with mistakes to avoid while taking a business loan.
1. Lack of Business Plan
Several business owners witness loan denial because of scattered or confusing business ideas and lack of business plan to be provided to the financial institution, they seek loan from. Informative business plan is thoroughly checked by the lender before loan sanctioning. If there is no business plan presented then lender builds negative impression of the loan applicant resulting in loan denial.
Also Read: How to write a business plan?
2. Choosing Collateral
As business loan is an unsecured loan, still in several cases collateral is required by the lender in case of equipment loan, asset backed loan, secured term loan, personal guarantee, inventory financing, letter of credit, bill discounting, and vehicle loan for commercial purpose, etc. Lenders want timely repayment of loan and to secure it applicant needs to have collateral to submit in form of residential or commercial property (shop, office, godown), inventory, raw materials, stocks, equipment, commercial vehicles, etc. Lack of collateral may again result in loan rejection.
3. Poor or Defaulted Financial History
This is the most important factor in availing business loan. If you have not maintained good financial history or have defaulted on any lending product(s), then the chances of getting loans from banks become low. However, in today’s financial market there are numerous Non-banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs) that offer lending products, but at comparatively higher interest rates, as the risk factor is higher for these types of companies.
4. Bad Credit Score
Credit score is often checked by lenders before loan sanctioning and bad credit score may also result in loan application rejection. You should maintain good credit or CIBIL score before applying for business loan. Credit score ranges from 300-900, wherein any score above 700 is considered good by banks. Credit score does not changes overnight, so you have to be patient while your credit score increases gradually with your regular repayments of loans or credit cards, if any in form of EMIs.
5. Multiple Loan Applications
Applying for multiple loans or credit cards create hindrance in getting a business loan, as lenders make an impression that applicant is in desperate need of credit and whether he/she shall be unable to repay the amount borrowed from them or not. Lenders do not want to be at risk because of non-payment of loan by applicant aspiring for multiple lending products.
6. Borrowing more than Affordability
Checking your affordability and then applying for loan should be an ideal practice. At the time of loan sanctioning, lenders require all your financials and income proof to decide on the loan amount to be sanctioned. If your financials and income does not match with the loan amount proportionately, then lender questions on the applicant’s affordability and repayment capacity.
7. Avoid reading loan agreement
Generally, lending products come with exhaustive documents or agreement for the applicant to accept with signature. You should take your time in reading and understanding each and every aspect related to your desired loan. There are several hidden charges and clauses mentioned which are missed at time of loan sanctioning. Applicants hurriedly sign the agreement and later face the consequences of the same during repayment loan amount.
8. Doing significant financial changes
Last minute financial changes just before submitting business plan are not appreciated by the lender, as they want to see stability in your business. This action negatively impacts your business perspective and further may result in lowering your credit score. All these mistakes occur due to urgency or hurriedness, so to avoid it you can rework on the business plan before presenting it.
9. Applying for wrong loan product
Sometimes applicants are in hurry and they tend to apply for different loan product, realising it later and eventually paying extra money to change it. Financial market is flooded with lending products for you to choose. However, it is always recommended to patiently check and compare from all the available lenders and loan deals before finalizing any loan. People sometimes confuse is choosing somewhat identical loan options offered from different lenders.
10. Missing out on business information
Providing accurate and correct business information to lender should be the foremost criteria for loan applicant. Any mismatch in the provided information and submitted documents can land you in trouble and lender may question on the authenticity of provided information. Key information is required to be cross checked before submitting loan application form is your contact information, all business related details, website name, email address, and photo ID, address and income proofs.
Like other important financial decisions of your life, taking a business loans also holds much importance like other decisions do. Your career, children’s education, financials, earnings, household expenditure and daily expenses depends only on how your business performs. More the business will expand, better your livelihood will become. Therefore, to expand your business and enhance your living status, you just cannot afford to do any mistakes when applying for a business loan.