It is straightforward to apply for a loan for your business. Lenders have established eligibility criteria for the applicant’s age, business vintage, annual turnover, and other factors. A few additional documents must be submitted at the time of loan applications, such as KYC documents for the owner or establishment, proof of business address, financial records, etc.
Due to the competitive nature of lenders and the fact that many business owners have limited time, they have made their eligibility criteria flexible and simplified. They also make it easy for applicants to complete paperwork and get disbursed quickly. Many lenders make the whole process digital, while others provide doorstep service for customers who require it.
Common Mistakes to Avoid When Applying for a Business Loan
Even though the process is simplified, there are still cases when a business loan is rejected or subject to further scrutiny. Avoid making mistakes that could lead to rejection or delay. It is essential to avoid making mistakes when searching for the right lender.
1. Inadequacy of a business plan
Any lender will want to know the vision for the business before they approve a loan application. A business plan is the best document to describe this vision. It outlines how you intend to grow your business over the next few decades and revenue projections and market analysis.
A lack of a business plan can lower the confidence of a lender. This gives them the impression that the applicant isn’t sincere enough or doesn’t have the vision to take the business to greater heights. Any lender would reject a potential borrower with an evil business plan. This is not necessary for the form of project reports, but lenders require it in their interactions with promoters.
2. Insufficient documentation
Documents related to KYC, address proof, and income proof are required for business loan applications. You will save time and avoid searching for these documents last minute.
Insufficient documentation could give lenders the impression that the applicant isn’t fully complying with the requirements or trying to hide something. This could result in a delay or rejection of the loan application.
3. Falsifying and misrepresenting financial information
It doesn’t matter if the business is profitable or not. It is better to disclose the financial details to the lender. Every business experiences financial difficulties. It is essential to tell the lender why the company has lost money or how they plan to make it better.
A lender may be rejected if they discover that the financial information provided was manipulated. The lender may also reject this borrower.
4. Past red flags should not be revealed
Ensure to disclose any past defaults, bankruptcy, or other issues with regulatory or statutory authorities to the lender.
Lenders have robust systems (formal and informal) to check the history of borrowers. They may discover past red flags even if they intend not to. The lender might request more information or offer a higher interest rate to cover the higher risk.
5. Insufficient research to find the right lender
The availability of a business loan is a standard product offered by almost all banks and non-banking financial institutions (NBFCs). There are many things to consider before deciding on a lender. Compare lenders on the interest rate, pre-payment fees, customer service, flexibility of tenure, maximum loan amount, and ease of application. Also, compare the speed of approvals. It would be best if you took the time to research the lenders that meet your needs.
6. Bad credit scores
A credit score is a number that indicates a customer’s creditworthiness. Higher credit scores indicate a greater likelihood of the borrower paying back the loan on time. Higher credit scores increase the lender’s confidence by suggesting better financial habits. This can also reduce the riskiness of the customer.
Lenders may refuse to approve an applicant with a poor credit score because they perceive them as a higher risk. It is essential to have a high credit score and follow good financial habits.
7. Borrowing beyond what you need
You may be eligible to borrow more if you meet all of the requirements set by the lender. It’s very typical to want to borrow more than one originally intended.
This temptation should be avoided as you could borrow more than you can repay, which can lead to financial ruin. Please stick to your original plan, borrow what you need, and promptly refund it.
8. Multiple loans can be running at once
It is not a good idea to apply for another loan if one has already applied for the loan. Lenders may be concerned if too many loans are being used at once. This can cause cash flow problems and raise red flags. Lenders may view it as an indicator that the borrower cannot pay the current expenses and manage cash flow. Keep your loans to a minimum, and only borrow when necessary.
9. Apply to multiple lenders frequently
For two reasons, you should not apply to multiple lenders at once. It gives lenders the impression you are in desperate need of a loan. Numerous loan inquiries can adversely impact credit scores. You should research carefully to find the right lender and then only apply for that one.
10. Do not read the fine print
Although lenders will highlight the main features of a loan, many details are not mentioned in the fine print. Before signing up for a loan, take the time to review the fine print. Ensure you understand all fees, foreclosure conditions, late payment penalties, and other charges. This is so that you don’t get surprised by unexpected costs later.
Bottom line
It is best to avoid these mistakes, so your loan application for business does not get denied. A well-researched loan is the best way to propel your company into growth.
A business loan can be a valuable product to expand your business and take it further. So that you don’t get rejected or delayed, it is a good idea to prepare before applying for a loan. You can ensure smooth sailing on your financial journey if you borrow responsibly, spend wisely and repay promptly.
