Along with years of hard work, one of the most important prerequisites for commencing and successfully running a business is having adequate investment capital. This is true for all businesses, irrespective of size. One of the easiest ways to address these needs is by opting for a business loan. Obtaining a business loan can be quite cumbersome & frustrating if not done the right way. Many individuals may not pay attention to certain factors or aren’t fully aware of the documents required for a business loan, resulting in mistakes while applying, leading to the rejection.
Let us look discuss some common mistakes to avoid while applying for a business loan-
One of the most prevalent causes of loan applications getting rejected is because the business owners hastily get over with the loan procedures without completely understanding the requirements for the particular loan product. One must always carefully check the eligibility criteria on the lender’s website & accordingly collate the documents required for a business loan. Various loan products may require the borrower to submit a specific set of documents on a case-to-case basis. The regular business loan applications require the borrower to submit details of Income tax returns, PAN Card, company ownership evidence, KYC of the owner, company balance sheets, company audit reports, proof of identity and residence, registration certificates, income, and expense projections, etc.
Know your credit score
One of the vital prerequisites for a business loan approval is maintaining a good credit score. A high credit score translates into a well-reputed image as a borrower and affirms that the borrower has repaid all previous loans on time & holds a decent balance in the account. A borrower’s creditworthiness gets evaluated by his credit history, which in turn acts as a crucial factor in the approval of the business loan. So, make sure to obtain a copy of your credit information report from credit bureaus and then take appropriate steps to improve the score if it’s poor or gets it rectified if there’s an anomaly before applying for a business loan. Character, Capacity, Capital, Conditions, Collateral- The 5 C’s of Credit that the lenders evaluate before approving the business loan application
Misrepresentation of your business financial records
Keeping your financial documents in order before applying for a business loan is imperative. Amongst the documents required for a business loan application are the details of your business’s assets, liabilities, income, and expenses. It is extremely important to represent your accurate & correct financial status rather than displaying inflated income and reduced expenses just to show a more profitable financial position than the ground reality. Presenting a falsely inflated book of accounts is one of the biggest mistakes which will result in the loan application getting rejected & could also land you into legal issues. Providing a thorough, honest disclosure of your financials is the safest & best approach to be followed while applying for a business loan.
Not registering your business
Most individuals commit a common mistake in applying for business loans even before getting their business formally registered with the relevant authorities. During the process of approving loan applications, most lenders verify the proof of business registration as a part of standard documentation. If your business is not registered correctly, it could lead to outright rejection at the eligibility check stage, even if you maintain profitability and a positive turnover. To avail of the business loan benefits, it is pertinent to complete a formal registration of your business as this promotes easy access to credit facilities and other perks.
Applying for the right loan product
Various business loan options are designed for different purposes, available for Medium and Small-Scale Enterprises (MSMEs). There are loans against property, equipment financing, start-up loans, working capital loans, overdraft facilities against collateral or securities, etc. The entrepreneurs may get confused with identical business loan products, and they may choose the wrong product. You must apply for the right loan product best suited to your needs by doing thorough research. You could also look out for customized loan options and take advantage of business loan benefits.
To summarize, be mindful of the aspects that the lender would consider while scrutinizing your business loan application. Apart from above mentioned mistakes, some other common ones that are observed during business loan applications are –
- not reading the loan agreement or fine print thoroughly,
- forwarding multiple loan applications at a time, and
- non-disclosure of crucial business information leads to delay in processing or also causes a denial.
Business loan benefits can be enjoyed by being organised and thorough in your research & all aspects of the documentation.