Mistakes to avoid when applying for a business loan – Forbes Advisor INDIA
Applying for a business loan is a fairly straightforward process. Lenders have set eligibility criteria regarding the applicant’s age, business vintage, annual turnover, etc. In addition, a few documents must be submitted at the time of loan application such as KYC documents of the owner or establishment, the company’s proof of address, financial documents, etc.
For competitive reasons and the fact that business owners are short on time, most lenders have made their eligibility criteria flexible, application process easy, minimum documentation requirements and fast disbursements. Some lenders have digitized the entire process while many others offer door-to-door service if requested by the customer.
Common mistakes to avoid when applying for a business loan
Despite the streamlined process, there are instances where a business loan is rejected or subject to further review. Any potential borrower should steer clear of errors that may lead to such rejection or delay. Likewise, there are some mistakes to avoid when looking for the right lender.
1. Lack of a concrete business plan
When applying for a business loan, any lender would like to know the business vision. The document that best describes this vision is a business plan. It shows how one plans to grow a business over the next few years, revenue and profit projections, market analysis, winning strategies you plan to adopt, and more.
Not having a proper business plan in place diminishes the lender’s confidence, giving the impression that one does not have the vision to take the business to the next level or that applicants are not not sincere enough. Any lender would steer clear of such a potential borrower. Although this is not required in the form of a project report but the same is gathered in the interactions with the developer by the lenders.
2. Insufficient Documentation
A business loan application normally requires submitting KYC related documents, proof of address, proof of income, establishment details, etc. It is best to keep all these documents ready so that there is no wasted time searching for them at the last moment. .
Providing insufficient documentation could give the lender the impression that either applicant is not fully meeting the requirements or is trying to hide something. This could result in a delay in loan processing or an outright rejection.
3. Falsification or misrepresentation of financial information
Whether the business is profitable or loss-making, it is always better to reveal the real financial situation to the lender. All businesses go through tough times financially and so it is best to explain to the lender the reasons for the loss or low profit and the plans to improve things from now on.
If a lender discovers that they have received manipulated financial figures, this will result in an outright rejection. The lender may also be reluctant to lend to such a borrower in the future.
4. Not Revealing Past Red Flags
If there have been defaults on a loan in the past, bankruptcy, or trouble with regulatory or statutory bodies, make sure the same is disclosed to the lender.
Most lenders have strong mechanisms (formal and informal) to check the borrower’s history and they can uncover these old red flags, even if one intends to hide them. In such cases, the lender may submit the application for further consideration, at a higher interest rate to compensate for your higher risk, or even reject the application altogether.
5. Not doing enough research to find the right lender
A business loan is a widely available product with almost all banks and non-bank financial companies (NBFCs) offering it. With a plethora of lenders, there are several features to check before settling on one lender. Compare lenders based on interest rate, processing fees, prepayment fees, customer service, tenure flexibility, maximum loan amount, ease of application, documentation requirements, pace of approvals, etc. Take your time to do the necessary research to find the lender that best meets your criteria.
6. Have a bad credit score
A credit score is a number that reveals a customer’s creditworthiness. The higher this number, the more likely the borrower is to repay the loan on time. A higher credit rating increases lender confidence since it indicates better financial habits. It also potentially reduces the risk level of the customer profile.
If one has a bad credit rating, lenders may reject their application given the perceived higher risk. Therefore, it is always beneficial to maintain a good credit rating through disciplined financial practices.
7. Borrow beyond your needs
If you meet all of the eligibility criteria set out by the lender, you may qualify for a much larger loan than they require. It is very natural to be tempted to borrow more than you originally planned.
However, this temptation should be avoided, as you could end up borrowing far more than you can afford to repay and find yourself in a financial mess. Therefore, stick to the original plan as needed, borrow only what is needed, and make sure to repay it in a timely manner.
8. Have multiple loans in progress simultaneously
If one already has outstanding loans, it does not make sense to apply for another loan. Too many loans in progress at the same time can strain cash flow and set off red flags for lenders. It can also be seen by lenders as a sign that one is not able to manage business expenses with current cash flow. Therefore, keep loans to a minimum and only borrow when necessary.
9. Ask multiple lenders frequently
Don’t apply to multiple lenders simultaneously for two reasons. First, it gives lenders the impression that there is a desperate need for a loan. Second, multiple loan applications could affect credit rating. As mentioned before, take the time to research well to find a suitable lender and then only apply to this one.
10. Not reading the fine print
While lenders advertise the main features of a loan prominently, many other things are mentioned in the fine print. Take the time to read the fine print and understand all fees, charges, foreclosure terms, and even late payment penalties before you sign up for the loan. This is to ensure that one is not faced with unexpected charges later.
To conclude, it is better to avoid the mistakes mentioned above so that your business loan application is not rejected. A well-documented and optimally utilized loan can propel your business into orbit for growth.
A business loan is an extremely useful product for growing your business and moving it forward. It makes sense to be fully prepared on your end before applying for a loan from a lender so that there are no delays or rejections. Borrow correctly, spend wisely and repay in a timely manner and you can be sure to navigate your financial journey smoothly.