Maintaining steady capital is vital for any business, regardless of size. Working capital can be used to handle regular day-to-day functioning, but in order to expand or upgrade, businesses need additional funding. Obtaining funding can be a daunting task, and not every business is eligible to receive venture capital or investments. Thus, a business loan is often the best option.
But getting a business loan depends on a few key factors, such as whether or not you meet the eligibility criteria, if you submit the right documents, what your credit score and repayment history are, etc. Besides the right process, there are a few mistakes as well that you can avoid to ensure that your business loan is approved. Let’s take a look at what they are.
1. Not Registering Your Business
Several MSMEs (Ministry of Micro, Small, and Medium Enterprises) in India consider the registration process a tedious task. However, registering your business offers many advantages, such as access to resources like credit from banks, government schemes, and private lending institutions. It also enables you to establish your corporate identity and business type and access other benefits such as tax, logistics, and credit facilities.
For most lenders, having your business registered accurately is a must, as they may reject your loan application upon eligibility check even if your business generates profits and positive turnover. Therefore, having the necessary documents, such as a business license, business PAN, GST, Udyam number, etc., is crucial to secure the credit you need.
2. Working With Limited Cash Flow
Cash flow is an essential indicator of your business's financial health and often the first thing lenders examine when evaluating a loan application. If cash flow is insufficient, it can be a deal-breaker. To ensure proper flow of funds, calculate cash flow every quarter. Doing so allows you to make adjustments to optimize cash flow before approaching lenders.
To estimate how much you can afford to borrow, calculate your debt service coverage ratio by dividing your net operating income by your total annual debt. For example, a ratio of 1.35 indicates a healthy buffer between your cash flow and loan payments and is preferred by lenders.
3. Absence of a Business Plan
Adhering to a well-thought-out plan is far more appealing to lenders than impulsivity in the financial sector. This also increases your prospects of obtaining a business loan. Although it is not unheard of for small businesses to lack a formal business plan, or any plan at all, taking the time to formulate a comprehensive business plan is a necessity before approaching a lender.
A well-thought business plan should contain information regarding your company, market, goods, and finances. Additionally, you should be ready to explain to the lender how you intend to use the borrowed money.
4. Not Providing Sufficient Documents Not Choosing Your Lender Wisely
Taking out a loan is a major financial commitment that will affect your life for an extended time. Although lending regulations can offer a certain degree of protection, some dishonest lenders take advantage of borrowers with predatory practices. Therefore, it is essential to do your research before selecting a lender to ensure your finances are safeguarded.
Fortunately, with the introduction of digital payments and data-driven processes, applying for and being approved for a loan is simpler and quicker. Moreover, fintech companies like KreditBee make it their mission to bring a credit product to the common public with full transparency! Trusting a lender is now easier with KreditBee’s instant online business loan with easy eligibility criteria and flexible tenure.
5. Not Providing Sufficient Documents
When applying for a business loan, one of the most frequent errors people make is not having all the required documents. It is essential to be aware of the documents needed for a business loan application and have them ready. Not having the full list of documents can lead to a denied application, so ensure you have them all.
6. Displaying Inflated Books
Presenting inflated books of accounts to a lender when seeking a business loan can be detrimental. Inflated books are when you reduce your expenses and increase revenue on your account to appear more financially prosperous than reality.
Accurate data should be provided when it comes to profit, loss, and balance sheets so that the lender can assess the risk involved and secure funding quicker. Choosing to give false financial information can lead to delays and potentially cause the loan to be rejected.
7. Applying for the Wrong Business Loan
Different types of business loans are available for different purposes. Small businesses can access MSME loans, whereas working capital loans, loans against property, overdraft facilities secured against collateral, etc., are also available. Selecting the right loan for your needs is essential as choosing the wrong one can lead to difficulties, and transferring a loan incurs extra costs. Ensure you carefully assess the loan you require and research thoroughly.
A Loan for Every Business
There’s no need to put a full stop to your dreams of starting a business! Small business loans can help you speed up your entrepreneurial journey. A loan can help every self-employed individual expand their business and take it to new heights!
(Shikha Ahuja is part of the content marketing team at KreditBee - India's fastest personal loan platform where professionals can easily avail of personal loans in just a few minutes when in need of quick funds. Shikha writes to create awareness amongst her readers on topics related to loans, personal finance, and budgeting. Being a part of the FinTech industry keeps her on her toes, but she keeps herself grounded through yoga and meditation, and loves to host game nights during the weekends.)
