The most essential prerequisite is access to adequate investment capital to start or establish a business. However, business loan approvals can be challenging even if one has healthy credentials. As per Federal Reserve’s 2021 Small Business Credit Survey, around 12% of businesses required financing but did not apply as they believed getting turned down.
Nonetheless, read along to learn about the common mistakes to avoid when applying for a business loan.
Common Mistakes to Avoid While Applying for a Business Loan
One of the best ways to build your company is by opting for a business loan, offering you the necessary capital upfront to purchase stock, hire additional staff, purchase advanced equipment, etc. However, availing of a loan and utilising it appropriately can be a challenge if you are new to the procedure of acquiring a business loan.
Here are some common pitfalls that you need to be aware of when applying for MSME loans in India to increase the chances of approval:
Mistake 1: Not registering a business
Various MSMEs in the country, especially ones in the micro-enterprise bracket, find business registration process cumbersome. However, one of the best benefits that one can gain from registration is access to resources. Formal registration of business makes one eligible to acquire funds from financial institutions, private lending institutions and various government schemes.
Most lenders ask for business registration documents during the time of loan approval. Not submitting necessary documents required can lead to the rejection of a loan application. Therefore, registering a business is a must.
Mistake 2: Providing insufficient documents
This is one of the most common mistakes that individuals make when seeking a business loan. Ideally, lenders ask borrowers to submit a range of necessary documents during the time of business loan application. However, not submitting the entire list of business loan documents can lead lenders to reject a loan application. Therefore, it is wise to learn about the documents required for a business loan application and keep them handy.
Mistake 3: Applying for multiple loans
Multiple loan applications in quick succession significantly affect loan borrowing and approval. This can ultimately end up hurting the prospect of business loan approval. Lenders consider such applicants’ credit hungry. Each time one applies for a loan, the lender verifies his/her credit history with CIBIL, which is known as a hard inquiry Credit bureaus register each inquiry, and multiple inquiries will define the applicant as a high credit risk borrower, hurting his/her credit score and impacting the chances of acquiring loans.
Mistake 4: Not researching lenders thoroughly
Since borrowing funds is a significant financial decision, customers must research various lenders in the market and choose the right one offering the lowest interest rate and better servicing terms. Moreover, it is necessary to pick the right kind of loan for a business.
Since there are various business loan options available in the market, borrowers must conduct thorough research at this stage to determine the kind of loan they require to achieve business objectives. Furthermore, factors like business loan eligibility, interest rate, tenure, terms and conditions, etc., must be factored in at this stage.
Mistake 5: Not understanding loan products and terms and conditions
In general, loan products can be complicated. This is because they come with extensive information and jargon difficult to deduce by a layperson. Therefore, a borrower needs to understand the loan product before proceeding with the application. Furthermore, understanding how loan products can be utilised, EMI, prepayment options, and associated terms and conditions are essential to ensure hassle-free and affordable borrowing.
Also, some lenders impose high fees and charges that can increase the overall borrowing cost. Therefore, it is essential to go through the terms and conditions before opting for a business loan. Also, gaining a fair idea about monthly obligations by using a business loan EMI calculator will allow borrowers to plan their repayments efficiently.
Mistake 6: Not checking your credit score
Finance management is an essential step when proceeding with a business loan application. Before approaching the financial lender, one must be aware of his/her credit history and understand the cause of poor score, if applicable, and rectify it on time. It is necessary to maintain a healthy credit score of 750+ to assure the lender about one’s capability to repay the loan on time.
Besides, business loan borrowers must ensure their financial records are organised. Moreover, lenders will only offer loans if they are convinced about the success of a business. Therefore, if borrowers are willing to apply for a business loan, they can approach reputed financers extending a range of loan products.
Leading financial institutions offer access to lucrative benefits on business loans, thereby ensuring improved and affordable borrowing.
Listed above are some most common mistakes borrowers must provide before applying for a business loan. Learning about the limitations and possibilities associated with the borrowing process beforehand will increase the chances of loan approval. Once having a clear idea about the kind of loan required, the lender to approach, monthly obligations, etc., borrowers can make a better decision.
Disclaimer : The above is a sponsored article and the views expressed are those of the sponsor/author and do not represent the stand and views of Freepress Journal editorial in any manner. You can get in touch with them on email@example.com