Without a business loan, it could be difficult to scale your business, which could hamper the growth of your business. Business loans are available from commercial banks and non-bank financial institutions regulated by the Federal Reserve (NBFC). For one thing, using a business loan can be a difficult process. But you can simplify the process by avoiding some common business loan mistakes.
Most often, loan refusals are the result of honest mistakes, a lack of relevant information, or simply ignorance. Therefore, let’s find out these common mistakes to prevent your business loan applications from going badly.
An insufficient business plan
Many business owners find that they’ve been denied a loan because they haven’t offered the financial institution an organized set of business ideas or business plans. Before loan approval, the lender carefully reviews the borrower’s business plan, which should be an informational business plan. When lenders are unable to assert the legitimacy of the loan application, they form an unfavorable impression of the loan applicant, which subsequently leads to loan denial. Lenders will typically ask three key questions when approaching business commercial lending:
- How much financing do you need?
- What will the funds be used for?
- How do you plan to repay the loan?
A comprehensive business strategy is fully prepared to resolve all of these issues. A good business plan would include basic information such as operating costs, income, expenses, profits as well as the future potential of the business.
Provide copies of CA’s audited financial statements, including the income statement, balance sheet, and cash flow statement, as well as your company’s corporate tax returns.
Records of past faults
Often times, business owners underestimate their past missed payments. A major consideration for financial organizations is your past due. Your past loan records help them calculate your business risk profile. Keep track of your accounts receivable, business credit card bills, and invoices, and have a regular repayment schedule to improve your chances of being approved for a loan.
Borrow beyond your financial capacity
Before applying for a business loan, it is important to understand your current financial situation. First, figure out how much EMI you will need to pay, then figure out how much you can afford to pay. Then, only borrow what you can afford to repay.
Inadequate credit rating
The criteria used to decide whether or not to grant a business loan value varies from lender to lender. Your credit score is taken into account when your request is processed with all credit institutions. An excellent credit rating can help you in your attempts to negotiate loan interest rates.
It is recommended that you maintain a solid credit history and a decent CIBIL score before applying for a business loan. Credit scores range from 300 to 900, and any number over 700 is considered a high score by financial institutions. Credit scores don’t change overnight, so you will need to be patient as your credit score increases as you regularly make payments on loans or credit cards, even if you need to make payments in the form EMI (ie automatic payment from your bank). â
Skip the fine print
Ignoring paperwork comments is another common business loan mistake that many people make. When the loan is approved, perform a thorough audit of the loan documents. Legally binding documents should only be signed if they are fully understood. Whenever you are faced with difficult financial conditions, seek the help of a financial expert.
There are a number of hidden charges and conditions that are not taken into account when approving the loan. After applying, many rush to sign the deal but then face the repercussions while paying off their loans.
To qualify for a loan, the liquidity ratio of your business is examined. Liquidity refers to both having cash on hand and having access to money in the bank. People who have a financial reserve are more likely to be eligible for business loans.
Contract with guarantee
In the case of an equipment loan, bill discount, asset-backed loan, inventory financing, guaranteed term loan, personal guarantee, In a letter of credit and a vehicle loan for business purposes, a guarantee is sometimes requested by the lender. When applying for a loan, lenders want on-time repayment and a guarantee that the money will be safe.
To obtain it, borrowers must have collateral (real estate, warehouse, inventory, retail trade, raw materials, equipment, stocks, commercial vehicles, etc.). The lack of collateral could lead to a new loan denial.
New businesses do not benefit from unsecured and unsecured loans from banking institutions. Make sure you know what your collateral will be before you apply for a loan. Your selection of collateral should match the loan amount you are applying for.
Small and medium-sized businesses that have been in business for three years or more can qualify for loans without the requirement of collateral.
Request incorrect loan options
Applicants can switch from one loan product to another without acknowledging that they have applied for each one before the final stages of the application process. For you to choose from, there are several loan products in the financial industry. Before entering into a loan, it is suggested that you conduct an exhaustive research to see if there are other loans and loan agreements with which to compare. In some cases, people confuse finding a little variety of loan packages offered by several lenders to be decisive in loan decisions.
Default or bad financial history
The best way to get a business loan is to focus on this factor. You will have a hard time getting loans if you have a bad credit history or if you have defaulted on a loan product. NBFCs and MFIs offer loan products, but usually at higher interest rates, as the risk component is greater for these types of businesses.
Apply for multiple loans
Lenders may feel that someone who has applied for multiple loans or credit cards is in desperate need of credit and would be unable to repay the amount borrowed. Due to the possible non-payment of loans, lenders do not want to risk losing their money to the benefit of an applicant seeking multiple loans.
Getting a business loan is as crucial as making other important financial decisions in your life. As your career, your finances, your children’s education, your income, your household expenses and your daily expenses depend on your business, you will only be successful in these areas if your business is successful.
As the business grows, your income will improve. Therefore, expanding your business and improving your standard of living are mutually exclusive activities. If you are pursuing one, you simply cannot afford to make these business loan mistakes when applying for a business loan.