For any MSME business owner, getting a business loan is one of the most important steps to grow a company or solve financial problems or maintain a stable cash flow. A business loan provides the capital you need for buying equipment, hiring staff, expanding operations or managing cash flow. However, most individuals commit mistakes while applying for a loan. This, therefore, delays the applicant and most cases receive high interest rates or are rejected outright. Prepare for your business loan; that is how you save yourself some dollars, hours and tension if it turns bad.
Some of the common mistakes in the application process for business loans are discussed below.
Common Mistakes to Avoid
1. Not Meeting Eligibility Criteria
Every lender has specific eligibility criteria for business loans, such as minimum turnover, business age or industry type. A common mistake is applying without first checking if your business qualifies. Submitting a business loan application without meeting the lender’s requirements can lead to rejection, which also impacts your credit report negatively.
What to Do Instead
Before applying, check the lender’s eligibility criteria list. Make sure your business meets those conditions. If it does not, then work on those aspects, such as increasing revenue or waiting until your business is old enough to qualify, etc.
2. Having a Low Credit Score
Your credit score is often the first thing lenders check when they consider approving a loan. A low credit score signals that you might be a risky borrower. It can lead to your application getting rejected or approved at a higher interest rate.
Alternative Action:
Check your credit score beforehand. If it is low, improve it by clearing outstanding debts, paying bills on time and avoiding unnecessary credit inquiries. A credit score above 700 is considered good for securing loans at favorable terms.
3. Not Preparing Financial Documents Properly
Lenders require income statements, balance sheets, tax returns and bank statements among other financial documents. Many applicants fail to provide accurate or updated documents, which delays or disqualifies them.
What You Should Do Instead
Keep ready your financial books before applying for a loan. Work with your accountant to ensure that all your documents are correct and updated. This shows the lender that you are serious and financially responsible.
4. Taking More Loans Than Needed
Some businessmen take a loan amount way more than they need. That means having to pay high amounts towards the debt, higher amounts as interest and sometimes defaulting on it.
Do the following:
Know how much you need exactly and borrow not more. Have an easily understandable business plan outlining exactly how the funds would be used and how they will generate returns through a loan.
5. Ignorance of Loan Terms and Conditions
Many individuals pay most attention to the interest but leave the loan terms on the back burner and then forget the repayment schedule and all fees, penalties and more.
It can thus cause a shock later such as additional charges or onerous repayment terms.
It is better to instead:
Read the loan document attentively to understand and make sure all terms are clearly known before signing an agreement. If unclear to a financial advisor or consult a lender for clarification.
6. Applying to Several Lenders at Once
One of the ways in which few MSME business owners approach banks and NBFCs for business loans is to increase the possibility of approval. However, it could negatively affect your credit score since each application raises a hard inquiry on the credit report.
Instead
Before applying for an MSME loan, research lenders and shortlist one or two that fit the requirements. Apply to those after proper preparation.
7. Lack of business plan:
Lenders are interested in knowing how you will use the loan and whether your business can repay it. Moreover, many applicants present unconvincing business plans, thereby decreasing their chances of approval.
Rather:
Prepare a detailed business plan showing your goals, financial projections, and strategies. Describe how the loan will benefit your business and how you will repay it.
8. Failure to Explore Other Alternatives for Loans
Not all loans are offered by traditional banks. Several NBFCs and other financial institutions offer better terms or lower interest rates with the required business loan amount.
What to Do Instead:
Before applying, research other lending options for both banks and NBFCs and government schemes for MSMEs as well. Compare the interest rates, eligibility criteria and terms of repayment. Choose that best fits your business needs.
Conclusion
Applying for a business loan is a smooth and successful process if you avoid common mistakes and take the time to prepare thoroughly. Simple steps such as ensuring you meet eligibility criteria, maintaining a good credit score, organizing financial documents and understanding loan terms make a big difference. Knowing your loan amount, coming up with a well-thought business plan and also keeping options such as NBFCs can help you acquire funds for your business without creating stress on yourself. Business loans will be very effective if they are used under the proper planning and proper choice of options.
NBFCs are an excellent alternative to traditional banks for obtaining business loans. They are more flexible, quick in processing and also less stringent with their eligibility criteria. Most NBFCs target small and medium-sized businesses, hence becoming a great avenue for entrepreneurs whose propositions might not make it through the strictures of a traditional bank but may be considered by other lenders that they might compare interest rates and terms.
