A business loan is a loan taken to fund financial needs of a company, organization and establishment. As finance is an important aspect to run a business successfully, you would not want to make any mistakes while applying for the business loan with the lending institution. However, there are some common mistakes that people make when applying for a loan, and we have listed out these, so that you can prevent it from happening with you.
- Waiting for the Right Interest Rate: Interest rates never remain the same, but can often fluctuate. Of course you would like to find a lower rate than what exists today, but lock it in before the rate goes up. If the conditions are right for your business to flourish, then do not make the mistake for waiting for the interest rate to drop, you never know, perhaps it would rather surge. You can find out the best interest rate by comparing loan offers from several financial institutions.
- Not Stating the Intent for the Funds: Though it is obvious that you would require a loan for business for organizational activities, it is always best to disclose the real intent of the end use of the funds. Maybe you need finance to upscale production, buy new equipments, purchase a new workplace etc. Make sure you open up about the reason you want the funds for, to the lender. It helps in establishing trust and it is easier for the bank to analyze your loan eligibility.
- Not Knowing Your Credit Score: Before applying for the loan, you should know where you stand when it comes to credit rating. Get copies of your credit score to know if you fulfil the credit score criteria of the business loan offer made by the financial institution. The bank or NBFC may even want to check the compare credit score.
- Applying With a Bank without Comparing Options: Although there are many banks and NBFCs that offer business loans, people head to their local or existing bank the first without trying to shop around. Without comparing loan options and lenders, you would not know if an offer is the best for you or not. You need to compare the interest rates, processing fees, penalty charges, pre-payment charges, eligibility criteria, and other terms and conditions to understand which financial institution and loan are the most suitable for your needs.
- Major Change in the Company: Just like you would not close various credit cards before taking a personal loan, you would not want to make any significant change to your ongoing business before applying for a loan for business. Financial institutions want to trust you, and that comes with the stability in how you perform in your industry and with whom you work with. Any major changes, especially those that can potentially destabilize the company for a while, can go against you.
- Lacking Financial Documents: You should not apply for the business loan if you do not have proper financial documentation. Without essential documents, such as proof of business turnover, ITR, profit and loss sheet etc, the financial institution will not sanction the loan. Thus, keep your finances and related documents up-to-date beforehand.
- Having No Collateral: Though unsecured business loans exist today, it is always advisable to have some collateral or security, just in case you are not able to get an unsecured business loan. Otherwise at the last minute, you would be in a fix, and may not get loan approval. If you are specifically looking out for unsecured loans, then apply for the ones that do not demand any security.
- Poor Growth Ratio: If your business is not doing well in performance or does not have sufficient investments, it is possible that your loan application would be rejected. Though you would want funds for the lack of it, the company should still show some positive returns or good promise, otherwise it would be difficult for the bank or NBFC to trust you with funds, especially if the loan is an unsecured one.
- Not Having a Concrete Business Plan: You have to demonstrate how your company will operate and generate money. Though the business has fair amount of vintage, but not backed up by a concrete business plan, then the lender may not find you as a suitable candidate to provide loans. You must include all supporting data and financials to convince the banks and NBFCs to offer you a loan for business.
- Not Reading the Terms and Conditions in Loan Agreement: You would be certainly happy to know that the bank you applied with has approved your loan application. What would you do next? Sign the loan agreement and be done with the process. However, if you do so without reading all the terms and conditions in the agreement, then it may be an unwise thing to do. You should take time to read everything carefully. If you have any query, then you can clarify it before signing the agreement.
Keep in mind the above-given conditions and things you need to avoid before applying for a business loan.