If you are looking for a small business loan for your small business or startup business then you must be aware that you are to prepare yourself well before you apply for the loan. Getting approval on a business loan application needs some more effort to put as compared to a personal loan or home loan. The percentage of rejected business loan applications are much higher than the approved one. The lender always becomes stringent while evaluating a business loan application as the risk factor is always high when it comes to a business loan, so is the reason for a high number of rejections.
To make things little easier for you, here we have compiled 10 mistakes of business loan which you should definitely not commit if you want to improve your chances of getting a loan.
Top 10 Business Loan Mistakes
- Waiting till the Last Moment
Some business loan borrowers are found to apply for a business loan when they realize that their business is not able to survive any more without an immediate financial boost. If you apply for a business loan when you have reached the edge, it becomes risky business. To avail a new business loan, it takes the minimum of a months’ time as you are to search the right lender, getting the documents ready, applying for the loan and so on. Taking the time consumed in the business loan process into consideration, one has to start looking for a business loan when there is enough time in hand.
- Not Checking Credit Score in Advance
The credit score of the loan applicant and the business both are equally important for a business loan approval. Prior to sanction a business loan, the loan provider checks the credit report of both the business and the loan applicant to understand the credit behaviour. Any kind of discrepancies found in any of the reports can make a loan application go rejected. One has to keep both the credit scores in check before applying for a business loan.
- Applying for Multiple Loans Simultaneously
Some loan seekers make a mistake of applying for multiple business loan at the same time. Many of the loan seekers have a wrong perception that applying for multiple loans from different lenders increases the chance of getting the loan. But the effects of applying for multiple loans are totally adverse. Applying for multiple loans shows a credit hungry behaviour of yours and your credit score is gets a hit. Instead of increasing, the chances of getting a business loan decreases by applying for too many loans.
- Not keeping your Documents Handy
To avail a business loan, a loan applicant has to submit a pile of documents which includes the personal documents and the documents of one’s business. Not only the documents, one has to prepare a business plan too which will mention the usage of the loan amount and the potentiality of earning a profit in future. A business loan plan is a very important document and the approval or the rejection of the loan depends a lot on the business plan. It is mandatory to submit all the documents property and the absence of any of them can result in getting the loan rejected.
- Failure to Provide Adequate Collateral
A business loan is a secured loan. A secured loan is a kind of credit which is backed by any of the assets of the loan borrower. The maximum loan amount of a secured loan depends on the market value of the collateral. Being a borrower, one has to keep collateral which has a considerable market value if you want a really high amount of loan. Without strong collateral, you will not be able to get a high amount of loan despite having a good credit score or business plan.
- Uncertain about the Purpose or Loan Amount
When you apply for a business loan you are to determine the usage of the loan before you apply for the loan. When you will make up your mind on the usage of the loan, you can have an idea on the exact amount you are going to need. Being uncertain about the purpose of the loan, you can never estimate the right loan amount. This may cause inadequate fund or excessive fund and both are harmful to your business.
- Not Keeping Business Accounts Updated
Before you apply for a business loan, one has to make sure that the business accounts are in order. The business accounts for a minimum of previous two years is demanded by the lenders. If your business account is not updated, the lender may have a perception that you cannot keep an accurate track of your profit and loss statement. Banks like to know how you performed in previous years to know your worth. If you can show that your accounts are cleared at the end of every financial year, it will create an impression that you are disciplined in your finances. Hence the chances of approval enhance. Lenders provide you with a business loan only when they find less risk in investing your business.
- Not Shopping Around for the Best Lender
The business loan providers are in abundance in the market. If you are eligible for a loan, there are many lenders who will be ready to give you a business loan. But many a time, loan applicants don’t research on the lenders and head to the lender whom they took in confidence from a long time. In this way, sometimes they approach local lenders without having research on the lenders functioning in the present market. This is a wrong approach of choosing a lender for your business loan. The chances of finding a better lender increases when we research on lenders.
- Signing an Agreement without Careful Consideration
The business loan document is quite lengthy documents which come in a booklet and flooded with jargons. Many a time, it becomes difficult to understand all those technical terms. Because of all those reasons, most of the loan applicants are found to put their valuable signature on those papers without reading it carefully. This is one of the biggest mistakes of a business loan. Signing the loan document without knowing the terms may make you face a number of issues in days to come. If you are unable to understand the terms and conditions, you should better take help of a professional lawyer who can simplify the business loan terms to you.
- Not Locking the Interest Rate
Generally, the business loan interest rate comes in at a floating interest rate which fluctuates with the market variations. But there is a facility which is called ‘locking the interest rate’. If you feel that you have got the loan at a good interest rate and there are chances that the interest rate may go high in coming days, you can freeze you the interest rate for a certain period of time by paying some extra money.
The Last Lines
The right business loan and the optimum use of the loan amount can become a stepping stone for your business. But before you apply for a business loan, make sure that you have prepared yourself well for the business loan. Along with all those preparation, be aware that you don’t commit any of the business loan mistakes mentioned above.
Have a Happy Business Financing!!!