Lending institutions consider a lot of aspects before approving a business loan. Business loans are usually unsecured loans and the bank or financial institution tries to mitigate the risk of default by carefully analysing key aspects of your financial behaviour.
We have listed five things that you must avoid before applying for a business loan to improve your chances of availing finance.
Look into your personal credit history:
If you have credit cards or existing loans, ensure that you don’t miss a single payment. One of the most important parameters of a credit score is the repayment history. A single missed / late payment can drastically bring down your credit score. Try to keep the repayment history as strong as possible.
Here’s how you can improve your credit score.
Not having a business plan:
Banks and financial institutions take business plans into consideration when trying to determine creditworthiness. A business plan shows the lenders your business’s goals and how you plan to reach them. Also, it shows how well you know your industry in order to succeed in it. Make sure you have your plan ready before you apply for a loan.
Not maintaining minimum balance in your business or personal account:
Any lending institution will try to find out if you have enough flow of cash to meet your installments. An account balance that is below the minimum required by the bank is usually a sign of a business that isn’t performing well.
Negative balances are worse as they are a sign of a business that might not be able to repay the loan. Try to maintain a balance slightly above the minimum required at all times. This creates the impression of a stable business.
Incomplete/incorrect documents and financial statements:
Lending institutions assess your credibility and the potential to repay the loan on the basis of the documents provided by you. Incomplete or incorrect documents can create a negative impression leading them to believe that you might not be committed to the business and that might lead to the rejection of the loan application.
Provide all the documents required by the banks or financial institutions and ensure that you have all the permits and certificates required before applying for the loan.
Not reading the terms and conditions:
All successful people will resonate one thought: ‘Read the fine print before you sign.’ Usually, entrepreneurs underestimate the value of reading the agreement in detail before signing it. Ignorance to the terms and conditions can lead to problems in the future and even financial loss.
Read thoroughly and seek assistance from a professional if you feel the need before signing the dotted line. All verbal offers/promises made by the loan sales officers need to be documented somewhere to prove their authenticity.
To successfully obtain a business loan at a good rate and mutually agreeable terms and conditions, it is imperative that you avoid these mistakes. Take your time and research well before you apply for a loan. Avoiding these mistakes can save you a lot of time, effort and money and help you obtain a loan approval relatively easily.