Working capital is the lifeblood of every business regardless of its size and sector. As a business owner, you can take advantage of business loans to meet your working capital needs without sacrificing ownership stake. You have option to choose from a wide range of business loans products provided by various banks and non-banking financial companies (NBFCs).
The credit requirements and eligibility criteria differ from one type of business loan to another. You can always consider availing the business loans provided by various RBI-registered NBFCs to avoid strict credit requirements and lengthy approval process. But it is also important to avoid a number of mistakes of ensure approval and eliminate rejection.
7 Mistakes an Entrepreneur Must Not Commit while Applying for Business Loans
1) Lacking a Formal Business Plan
While extending a business loan, each lending institution evaluates the enterprise’s profitability and growth prospects. The lenders even require the business owners to provide a formal business plan with the information and data required to assess the enterprise’s expenses, revenues, profit, and growth potential. You can easily get the business loan application approved by submitting an elaborate business plan. But you still need to ensure that the formal business plan depicts the projected operating cost, revenue, and growth clearly.
2) Not Paying Your Bills on Time
Often entrepreneurs ignore the impact of missing bill payments, on business loan approval. While evaluating a business loan application, each lender checks if the borrower pays off various bills and utilities on time. You must pay off your account receivables, business credit card bills, and invoices regularly to boost loan approval chances. The timely payment of recurring expenses and bills will further contribute towards building a good credit track record.
3) Letting Your Funds Run Low
A small business loan will help you to meet working capital needs and improve cash flow position. But the lending institution will consider both cash-in-hand and cash-at-bank while processing your loan application. If your business bank account does not have adequate balance or your funds are running dry, there are always chances that the lender will reject your loan application. You must maintain adequate cash-in-hand and cash-at-bank to convince the lender about your ability to repay the business loan. Here are some tips for small businesses to manage cash flow efficiently.
4) Applying for Multiple Loans
As noted earlier, you have option to choose from a wide range of business loan products. Also, you have option to choose from business loan products provided by various banks and NBFCs. But you must remember that applying for too many business loans at a time will not improve loan approval chances. When you apply for multiple loans, the information will appear on the credit report and impact your credit score. Hence, you can easily boost loan approval chances by not applying for too many loans.
5) Not Maintaining Good Personal Credit Score and Credit Report
The business loan eligibility criteria differ from one lending institution to another. But each lending institution considers the borrower’s personal credit score and his business’s credit report while processing a business loan application. You can always increase business loan approval chances by maintaining a good personal credit score. Likewise, it is also important to maintain a good credit report for your business.
6) Applying Late for a Business Loan
Most entrepreneurs apply for business loans at the last moment. When you apply late for the business loan, it becomes difficult to negotiate with the lender for lower interest rate and favourable lending terms. When you decide to apply for a business loan, it is important to spend some time in evaluating various business loan products. Also, you need to compare the eligibility criteria set by individual lenders for similar loan products. The initial research will help you to avail the right business loan product without paying interest at a higher rate.
7) Not Identifying Collateral
Many lending institutions do not provide unsecured business loans to newly-launched businesses and start-ups. They even require the borrower to use a business or personal as collateral against the credit. If your business is relatively new, you may be required to use some assets as collateral to avail a business loan. It is always important to identify the personal or business asset that you will use as collateral before applying for the business loan. The collateral will influence the loan processing and improve business loan approval chances.
On the whole, you have to consider a number of factors and avoid a number of mistakes to increase business loan approval chances. However, it is always important to maintain good personal credit score and good credit history, in addition to preparing a concrete business plan and keeping your business accounts up-to-date.