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Ways To Avoid Common Mistakes Before Taking A Business Loan

 

Introduction

There’s a phase in every business where the owners need additional funding for either expansion or to wade through difficult times. While financial institutions keep calling and messaging to offer loans but in reality, the whole process is quite tiring. To add to the woes, the applicants don’t pay attention to the few things, which leads to the rejection of their loan application. So, here are some common things that one must avoid in order to get a loan approved quickly. 

Some common mistakes and ways to avoid them

  1. Taking a loan when you are financially unstable:

Simply put, don’t dig the well only when you are thirsty. Business owners wait for bad times to hit and only then apply for loans, which is not an ideal way of functioning. We all think when the business is going fine, what's the need for a loan? Well, that’s because it’s much easier to get a loan approved and that too with more favorable terms when you are in good financial standing with your business. Moreover, it takes time to sanction a loan and so, if you apply in your difficult times, the lengthy process can frustrate you. Needless to say, lenders may charge a higher rate of interest looking at your desperation.

  1. Choosing the wrong lender:

A good lender will not only sanction money but also will give you and your business the attention and resources it needs. There are many financing options available and you must do thorough research of what the terms and conditions of each lender are before finally choosing one. Supposedly, you don’t have collateral; you must approach a lender who doesn’t ask for it instead of getting rejected by someone who does. Also, pick a lender that has experience working with businesses in your industry.

  1. Not having a concrete business plan:

Having clarity about the amount of loan you need, a convincing plan about how you will repay, and presentation of a good marketing strategy about how the company will make benefits increases the chances of your loan application getting approved. You need to explain the whole business model to the lender and how it will generate profit.

A solid business plan assures the lender about your seriousness and inspires him/her to back you. Not having one or having a half-baked plan is a sign of instability, which no lender would take the risk to fund.  

  1. Not taking your credit score into consideration:

Maintaining a good credit score is a prerequisite for a loan application and yet some people fail to see its importance. A high credit score reflects your image as a borrower and testifies that you pay or have paid your loans on time and also keep a decent balance in your account. All in all, it shows you have the right credentials to repay the loan on time.

The loan is issued on the basis of borrower’s creditworthiness, which is evaluated by the 5 Cs – character, capacity, capital, collateral, and conditions. Lenders will access your credit history to evaluate your creditworthiness. So, obtain a copy of your credit information report from credit bureaus and then take measures to improve the score if it’s poor or get it corrected if there’s an anomaly before you approach the lenders.

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  1. Lack of sufficient cash flow to pay back the loan:

Businesses aim to make profits and then use a certain part of the profit for the growth of the company i.e. for buying equipment and inventory, hiring more staff etc. But there has to be a healthy ratio of money pumped into the business and the revenue it generates. If the expenses are greater than the revenue, it means the business has a negative cash flow, which does not impress the lenders. It also gives him/her the impression that you are more likely to default on the loan repayment. So, make sure that before you apply for the loan, your business is doing decently and has a healthy cash flow to show.     

  1. Unable to provide adequate collateral:

The secured loans require a collateral i.e. the borrower needs to put something valuable on stake as a guarantee so that the lender can recover the amount in case of a default. The collateral could be your property, car, jewellery, future invoices, or even the equipment paid for with the loan funds.

In case you are not able to repay the loan, financial institutions have the authority to sell them. While valuable collateral can bring the interest rate down or stretch the tenure period, inadequacy or unavailability of one can lead to loan rejection. What can be the collateral varies according to the lender, loan amount requested, the rate of interest etc. Hence, before applying for the loan, see what you are comfortable putting as a collateral.

  1. Over leveraging/Loan Stacking

Loan stacking or taking multiple loans can ease life initially but it proves to be a bad call in the long haul. Taking one loan to repay other loans reflects poorly on the credit score. Also, multiple loans mean multiple installments, which leave little liquidity for the business. However, you can opt for business debt refinancing. It is a procedure of replacing an existing loan with a new one because the new lender is offering a more favorable term. It doesn’t add to your loan list, instead lowers you EMIs.

  1. Not having the right documentation: 

Each lender in its attempt to eliminate any risk of fraud goes through several documents to ascertain the candidate’s credentials. So, it is very important that the applicant has all the required documents. Anticipate all kinds of proofs you need to submit during the application process and keep them ready because unavailability of a single document can lead to cancellation of the loan. You probably need to submit details of company ownership, balance sheets, tax returns, company audits, identity and residence proofs, registration certificates, income and expense projections, among others.

If your loan got rejected in the past, it might be because of one of the above reasons. But there's nothing to worry about. Just keep in mind the above-mentioned things and you will be well-prepared to meet the lender and get your loan application approved with ease. Knowledge of the lending landscape helps a lot and we all must avoid these small mistakes that can cost us a much-needed loan approval.


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Did You Know

Disbursement

The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.

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