Last updated on February 27, 2023
Do you dream of expanding your business operations? Do you have plans for purchasing latest machinery and equipment in your factory? Well, never clip the wings of your desire if you dream high but cannot afford to realise the same presently. Business loanscan come to your rescue. The much-coveted funds will reach your doorstep if you plan well and are determined to avail the same.
A business loan can be utilised not only for funding business expansion and capital expenditure, but also for stocking up the inventory, placing bulk orders with vendors, renovating offices, and boosting working capital. Such facilities apply to small and medium enterprises (SME) likewise.
Despite its lucrative nature, business loan applications involve complex documentation and intricate procedures. However, the process can be simplified by avoiding a few common mistakes.
Borrowing beyond comfort
Youshould always cut your coat according to the cloth available. Assess your current financial scenario before applying for a business loan. Grab a free online business loan calculator and estimate the amount of EMI payable. Check how much you can afford to pay. You are advised to borrow only the amount that you can pay back comfortably.Prepare a budget accordingly to arrive at the reasonable business loan amount. Many websites and financial blogs offer free online business loan EMI calculators.
Presenting an ineffective business plan
It is extremely important to have an effective and comprehensive business plan in place. Your business plan must be able to explain the business goals. It must also explain how a business loan would benefit your business and support your business goals. Ensure that your business plan is sufficiently equipped to answer three vital questions.
- How much funds do you require?
- How do you plan to utilise the funds if the business loan is granted to you?
- How do you plan to repay the business loan?
Ensure that your business plan includes key information like income, overheads, operating costs, expenses, profitability, and earning potential to support the above questions.Based on the answers, financial institutions scrutinise business plans minutely and decide on the business’ eligibility to be granted a business loan.Support your business loan application with robust records like CA-audited profit and loss statement, income tax returns, GST returns, cash flow statement, and balance sheet.
Past defaulter records
Look back and check on your past defaults. Ignoring your past overdues will adversely affect the credibility of your business and dampen your chances of getting approved.Financial institutions would dig up your past records to estimate the level of risks associated with your business. You are advised to manage your payment cycles well. Enhance your chances of business loan approval by maintaining a timely payment cycle for business credit card bills, invoices, taxes, and accounts receivable.
Poor credit score
Thecredibility of your business imprints on yours.Although business loan eligibility varies with different financial institutions, all of them study your credit score diligently while scrutinising your business loan application. All financial institutions rely on your credit score to determine if you can repay a loan fully. Prepared by Credit Rating Agencies, the credit score is a summary of your overall credit history. You must have a credit score of at least 750 to be considered for business loan on good terms. The closer is your credit score to 900, the better it is. Furthermore, good credit ratings imply that you run a fair chance of negotiating the business loan interest rate.
You are advised to keep track of your credit score. Many financial institutions offer online tools for checking credit score free of cost. You must stay aware of your current score and update lenders on your improved credibility. This way, you can avoid the undesirable situation of an incorrect credit score affecting your chances of getting approved for business loan. Otherwise, you’ll have no other option but to get a bad credit loan, which is subject to higher interest rates.
Insufficient collateral
Look before you take the big leap. Figure out what would be your collateral before applying for a business loan. Only afew financial institutions provide unsecured loans to a relatively new business. Choose your collateral wisely. Ensure that the selected collateral covers the coveted loan amount. An insufficient collateral may ruin your chances to be granted a business loan.
Furthermore, plan for but do not aim at the worst scenario. Do not choose a collateral with the intention of losing it. Select a collateral to ease the process of business loan approval. A few financial institutions, nowadays, consider giving unsecured business loans to businesses with a vintage exceeding three years.
Poor liquidity
Ensure that your business has a reasonably good cash flow. Maintain good liquidity – both in terms of sound balance and sufficient cash in hand. Eyebrows are bound to twitch if you do not have sufficient cash flow for daily business operations. The liquidity ratio of your business is crucial for your business loan eligibility. Chances of getting approved for business loan are better for businesses that maintain sufficient daily cash balance.
Incorporating major financial changes before applying
An important aspect that financial institutions look for in a business is stability. Major financial changes in your business would hamper its stability and may adversely affect your credit score. Such a situation would deteriorate your chances of business loan approval. Do not indulge in actions like adding new partners, selling shares, or selling off plant machinery if you want to maintain the consistent image of your business. This scenario, in fact, is similar to the mistake many personal loan applicants commit while closing and opening credit cards before applying for a personal loan.
Conclusion
Business loan approval is a two-pronged story. Fast approval and hassle-free disbursement depend not only on the lender but the business as well. Never commit the above mistakes while applying for business loan if you want a prompt disbursement and the realisation of your long-nurtured dreams.
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