A business loan can be extremely useful for your business venture. Whether you are looking to obtain a working capital loan or a business term loan, borrowing funds via this route can help you meet the financial needs of your business and also expand or scale it up as and when it may be necessary.
That said, there are many mistakes that are possible when you apply for a business loan. Knowing what these common pitfalls and errors are can help you steer clear of them when you send in your application for business-related funding. So, check out the common mistakes to avoid when you are applying for a business loan.
- Not checking or computing your credit score beforehand
Before you apply for a business loan, you need to know what the credit rating of your business is. If you are applying as a sole proprietor, your personal credit score is what matters. Get your credit report and check if your credit score is high enough for you to meet the different business loan eligibility criteria before you send in your loan application.
- Not checking the business loan eligibility criteria
Apart from the credit score, there are also other business loan eligibility criteria that you need to meet. Some of these include a minimum turnover limit, a minimum number of years of having been in business, as well as profit limits. Some lenders may even have an age criteria for the primary applicant. Check these details before deciding to apply for a business loan.
- Putting off the creation of a business plan
A business plan or a business strategy is a crucial part of applying for a business loan. It is important for the lender to understand what your business has in store and how you expect to grow it. A solid strategy will improve the chances of your business loan application being approved. It tells the lender that you know what you are doing and improves their confidence.
- Not having the required documentation ready
Paperwork is a pivotal aspect of business loan applications. Applying for funding without providing all the documentation required, or by providing incorrect or incomplete paperwork can be a costly mistake. You need to submit the necessary financial projections, past financial reports, as well as other basic proofs and papers. Ensure that you check the requirements and follow them diligently.
- Not comparing loan offers
It may be tempting to go with the first business loan offer that you receive. However, it pays to do a bit of research, check different business loan eligibility criteria to narrow down the ones you qualify for, and compare them all. This way, you can zero in on the loans that offer you the most competitive rates as well as flexible terms and conditions.
- Not locking in an interest rate
While it may not be prudent to lock in an offer too soon, delaying it too much can also be a costly mistake to make. If you wait around too much, interest rates may go up and you may find it difficult to match the rate you were initially offered. So, you need to strike a fine balance between comparing your options and locking in an affordable interest rate sooner than later.
- Failing to read the terms and conditions thoroughly
Reading the terms and conditions in the fine print is an essential exercise you need to do before you apply for a business loan. In a hurry to obtain funding, it is easy to skip this part and rush to sign on the dotted line. However, it is crucial to know what you are getting into, check for any hidden fees and charges and generally be aware of the conditions of the loan.
- Borrowing more than you require
This is another common mistake that many first-time borrowers as well as seasoned borrowers may be guilty of. If you find that you qualify for a loan, it can be tempting to borrow more than you actually require for your business operations. However, when not handled right, this can quickly escalate into high interest costs that may be tough to repay over the long run.
- Applying for several loans simultaneously
You may think that when you apply for business loans in a batch, you improve your chances of being approved for at least one of them. However, this can be counterproductive to your goal, because making too many loan applications over a short period can bring your credit score down. Needless to say, this, in turn, will adversely affect your chances of being approved for a loan.
- Choosing the wrong kind of loan
Lastly, there are different kinds of business loans. And it is easy to apply for the wrong kind of loan if you don’t know the purpose of each type of loan. So, take some time to do your research and identify which kind of business loan best suits your venture’s unique requirements. This way, you improve your chances of having your loan application approved.
These are some of the most common mistakes that large and small businesses tend to make when availing a business loan. In case you are planning to apply for a business loan in the near future, keep these issues in mind and ensure you steer clear of them. Look at the business loan eligibility criteria, having your paperwork and business plan ready, compare your options and read the fine print before you submit a loan application.