Learn about the most common mistakes people make when applying for a business loan and how to avoid them.

6 Mistakes to avoid when applying for a business loan

Growing a business requires plenty of resources, both tangible and intangible. One of the most crucial resources is funding. Regardless of the scale of your business, you need money to survive and thrive.

Business loans are a great way to arrange capital for your venture. However, securing a loan is not as simple as it sounds. Sometimes, a little carelessness can cause your loan application to get rejected.

To make the process simpler, we have curated a list of mistakes that people commonly make while applying for a business loan and how you can avoid them. 

1. Lack of a robust business plan

Any lender will evaluate your business plan before offering you credit. This is to understand the potential of your business and your ability to repay the loan. So it would be ideal if you have a concrete business plan in place to impress the lender. It should explain how exactly you plan to utilise their funds. 

An informative plan can present a good image of your business and build your case. Here are a few things you should mention to design a detailed business plan:

  • Nature and background of the business
  • Ownership structure
  • The management team and their expertise
  • Reason for borrowing funds
  • Execution strategy

2. Incomplete documentation

Quite often, businesses approach lenders without a proper understanding of loan procedures and requirements. It is a good idea to check out the lender’s website to understand the details properly.

First, understand the eligibility criteria for the loan product and determine whether your business fits the prerequisites or not. You should also be well aware of the steps in the process of acquiring the loan.

Since many supporting documents will be required to process your loan application, make a checklist of the required documents. Failure to present all necessary information and documents could lead to your application being rejected.

Related: 10 Bank Loan Schemes For Women Entrepreneurs

3. Cooking the books

Honesty is crucial throughout the loan process. Lending institutions often ask for financial statements or other information about your business to determine whether or not they should approve the loan.

Many businesses make the error of misrepresenting their financial statements to impress potential lenders. However, manipulating figures to show inflated profits can land you in serious trouble. Always present an honest and detailed view of your financials to avoid loan rejections - or worse, legal troubles.

It is always recommended that you accurately maintain your finances at all times. Record all essential details about assets, incomes, liabilities, and expenses.

4. Absence of collateral

Collateral refers to any asset that lenders accept as a form of security for loans. While some lenders may give small loans without any security, larger loans almost always have to be secured. Some common assets put up as collateral are properties, equipment, and vehicles.

Collateral works as a safety net and bolsters the confidence of lenders. It might be difficult for you to secure a loan if you cannot provide collateral. Needless to say, loans with collateral will be comparatively cheaper.

If you do not have assets that you can present as collateral, then look around for SME and MSME loan schemes that do not necessarily require collateral.

Related: Need A Business Loan But Have No Collateral? Check Out These Options

5. Picking the wrong loan product

There are several loan options available to businesses of all kinds. Some popular options are working capital loans, equipment financing, start-up loans, loans against property, and overdraft facility. These loan products might appear identical and can be confusing. You might end up selecting the wrong product if you don’t do your research.

An unsuitable loan product might increase your costs without meeting all your needs. Look for a customised loan option - this can be very effective in ensuring you receive the best terms.

6. Underestimating the loan cost

Before applying for a loan, understand the loan cost. Entrepreneurs often underestimate the expenses they might incur along the way. The cost of a loan could refer to the interest rate on credit or the total amount of money to be repaid. So, before you apply for the loan, make sure that your lender is transparent about all the details.

Related: Government Schemes That Can Help Women Entrepreneurs In India Grow Their Small Businesses

Last words

Not paying attention to the basic requirements listed above can hamper your chances of securing a loan. Therefore, it is crucial to maintain a checklist of all necessary processes and documents to avoid the risk of rejection. Remember to maintain a detailed financial history and a decent credit score to improve your chances. 

Further, you should be clear about what you will do with the funds and how you intend to repay the lender. Having such clarity helps maximise your chances of securing a loan and reduces the risk of landing yourself in a financial or legal mess.