In every aspect, a business loan plays a major role in bringing the cash flow and also enables in meeting the working capital requirements of every budding and established entrepreneur as well as the enterprise. Be it big or small every business requires capital for either its business expansion or any related activities. Size of the business will not matter when it comes to the need for business capital. The business loan is not a type of financial product that is availed often by all the business owners or enterprises. It is an important and crucial financial decision in which one must cautiously avoid the mistakes. Generally, no applicant will like to receive any loan rejection or denial letter from the financial institution as well as the lender due to very small mistakes, ignorance as well as lack of information. Here are some mistakes to avoid applying for a business loan.
Common Mistakes While Applying for Business Loan
Lack of a proper Business plan
Many business owners always face a denial in the loan process because of the chaotic as well as lack of proper business ideas. A proper business plan is required to be submitted to the financial institution where the loan is availed from. The business plan is fully checked by the lender before the approval of the loan. The lack of a proper business plan creates a negative impression with the lender, which will result in denial of the loan.
Picking a Collateral
Usually, the business loan is an unsecured loan, in most of the cases the lenders seek collateral for an equipment loan, secured term loan, inventory financing, letter of credit, vehicle loan for the use of commercial purpose and asset-backed loans. The lenders usually prefer the repayment of the loan on a timely basis and in order to have it secured the applicant needs to give collateral which can be in the form of a residential or commercial property, raw materials, godown, equipment as well as commercial vehicles. When there is a lack of collateral, there are high chances of having the loan rejected.
Low or Default Financial history
The very important factor in availing of a business loan is the financial history. When the applicant does not maintain a good history or has previously defaulted on any loans or lending products, this will eventually reduce the chances of getting loans from banks. The financial market today has many Non-Banking Finance Companies (NBFCs) and other financial institutions which offer lending products with high-interest rates. There is a lot of risk factor that is involved with these companies.
Bad or Low Credit Score
The credit score is always checked and looked upon before the approval or sanctioning of the loan process. The bad credit score of the applicant will result in the rejection of the loan application. The applicant must maintain a good credit score or CIBIL score even before apply for a business loan. In general, 300-900 will be the credit score and the score anywhere above 700 will be termed as a good score. The credit score cannot be changed or improved in a night and one must be very patient to increase the credit score gradually with proper payments of the credit card bills, timely repayment of loans, and also the EMIs.
Various Loan Applications
When the applicant applies for many financial loans or credit cards, it creates a barrier in availing a business loan as the lenders rule out the borrower since there is a desperation for the need for credit. The repayment factor comes into play in the mind of the lender as the borrower will be unable to pay the amount. Lenders will always want to avoid the risk, since the borrower fails to make a payment as he/she has opted for many lending products.
Loan amount borrowed more than Affordability
The applicant must always check for the affordability before planning to apply for the loan. It is the most ideal and effective practice. During the sanctioning of the loan, lenders will require all the financial and income proof to decide on the loan amount that is to be sanctioned. The affordability of the applicant and the repayment capacity is analyzed by the lender, to check if it meets the standards of that financial institution.
Lack of proper Reading of loan agreement
Most of the lending products usually come with the long tedious exhaustive documents or agreement which the applicant acknowledges with the signature. The applicant must take enough time in understanding and reading of the loan document. There are many hidden charges as well as clauses in between the lines of the agreement which are usually missed during the sanctioning of the loan. When the applicant signs the document in a hurry then there will be a lot of consequences to face during the repayment of the loan amount.
The change in the financial decisions made at the last minute before the submission of the business plan is not appreciated by the lender as it affects the stability in the planning of a business. This will also result in a lowering of credit score as well as impacts the business. These mistakes happen due to the hurried decisions made at the last moment by the borrower. Always re-work on the business plan before submitting it.
Choosing a Wrong loan product
When the applicant is in a hurry, there are chances of applying for a different loan product and one has to pay extra money for changing it after realizing the mistake. The financial market offers so many products for the applicant to choose and hence, there are many chances for this mistake to happen. The applicant must always have a closer look at understanding and analyzing the product and loan details as well as compare the lenders in the market for the best offers and packages. The applicant usually gets confused on some occasions and it leads to these problems.
Missing some of the crucial business information
The applicant must always have in mind to furnish the exact and correct details to the lender for the loan application. If the lender finds any mismatch or wrongful information in the documents submitted, it will end up in trouble for the borrower as it puts the authenticity to question. The lender usually cross-checks and validates all the information submitted. The details such as income details, address, business details, officially registered names in the website, email, and photo ID must all be double-checked before the submission.
Just like every other crucial financial decision made in life, a business loan holds an important value. Every other aspect in life such as career, education of children, property, ornaments, house as well as daily expenses depends solely on the proper and efficient running of the business. The more the expansion of business the better will be the livelihood. So there cannot be any mistakes while affording the business loan and the above factors will save from making any mistakes while availing the loan for business. Shriram Finance offers business loans at the most affordable rates and tailor made for every business needs. With Shriram City Union Finance, business loans can be availed at a quick pace and easy approval. Now make all the business dreams a reality with Shriram Finance.