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7 Mistakes To Avoid When Applying For A Small Business Loan Obtaining a small business loan and employing the funds strategically can be a great way to grow your business.

By Nelson Issac

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successfully applying for a business loan requires care every step of the way.

Obtaining a small business loan and employing the funds strategically can be a great way to grow your business. However, successfully applying for a business loan requires care every step of the way. This will help you avoid any pitfalls that can negatively affect your chances of approval.

Whether it is overlooking eligibility terms or preparing insufficiently, there are numerous gaps that you need to bridge. This will help increase your chances of getting a quick and affordable loan to scale your business.

Read on to learn more about the common mistakes you should avoid when applying for an MSME loan.

7 Mistakes to Steer Clear of When Applying for a Small Business Loan

To ensure that your application is approved quickly for the loan amount you need with a competitive interest rate, avoid these mistakes.

1. Applying without a Clear Plan of Utilising Funds

Showcasing sufficient knowledge about your business purpose, the sector or industry that it operates in, and how your products/services compete with others is the first step. Next, you need to have a compelling plan of how you will use business financing to boost revenue.

A lot of entrepreneurs may not know exactly where they will funnel funds. Not being able to explain how a loan will help you not just stay in business but grow can lead to rejection. So, before applying for a small business loan, make sure you can clearly state why you need the specific loan amount.

Also, have a clear idea of how these funds will help your business grow or scale. This is the only way that lenders will be confident of offering you funds and of receiving your payments on time.

2. Not Knowing or Weighing Your Options

Yet another point that many borrowers generally miss out on is not researching and comparing the available funding options. You can get secured loans, unsecured business loans, invoice factoring, cash advances, credit lines and more to fuel your business.

If you have decided on an MSME loan, keep in mind that different lenders offer different interest rates, repayment facilities and other value-added features. With digital applications and loan apps from reputed banks and NBFCs, you do not need to feel confined.

You can get a small business loan from any lender in India, no matter where you are. So, conduct a thorough research of various lenders offering nominal interest rates and favourable terms that align with your specific needs.

3. Going Ahead Even With a Low Credit Score

Your credit score reflects your borrowing and repayment history as per your credit report. It allows lenders to assess the risk you pose and your credit readiness. So, it is vital to your business loan application.

If you have a credit score that doesn't meet the minimum threshold as per the eligibility criteria set by a lender, do not apply. This simply leads to rejection or unfavourable terms that may make repayment strenuous.

Instead, check your CIBIL score in advance and ensure your score qualifies you for business financing. If your score is not up to the mark, work on improving it by:

  • Reducing your debt-to-income ratio
  • Reducing your credit utilisation ratio
  • Repaying debts or credit card bills on time
  • Showing experience with a mix of credit types

This can reduce the likelihood of rejection and allow you to get an affordable MSME loan.

4. Not Having a Proper Repayment Plan

If you fail to repay, you face penalty charges penal interest and may also lose your collateral. This can cause severe financial stress, and to avoid it, you must have a strong repayment plan in place.

Since business income is often considered unpredictable by lenders, prove how your income is stable. See if you have investments you can rely on or other sources of income that can help you repay your loan on time. You can also assess the flexibility in the lender's repayment options.

For instance, some lenders may allow you to choose a step-up EMI option, while others allow you to pay only interest as EMI during the early loan tenure. The right planning can not only help you get a business loan with ease, but also reduce your stress once repayment starts.

5. Failing to Check the Eligibility and Other Requirements

When you apply for a small business loan, you must meet the eligibility criteria set by the bank or financial institution. You also need to submit certain documents for verification purposes. Not meeting the eligibility criteria or missing out on paperwork can lead to rejection.

To avoid this, check the requirements beforehand so that you can arrange all documents and ensure that inconsistencies in names or spellings are resolved. This can increase the chances of getting your business loan approved, saving you time and effort.

6. Applying for Multiple Credit Facilities at the Same Time

Yet another mistake many MSME loan applicants make is applying for multiple credit solutions simultaneously. When a business is facing a shortage of working capital, this is even more common as you may try to increase your chances of approval.

However, this is not the right approach since multiple enquiries at the same time reflect negatively on your credit report. When this happens, lenders perceive you as a risky borrower. Therefore, apply for a business loan carefully and by choosing the right option from the get-go.

7. Not Keeping Your Financial Statements Handy

When you apply for a small business loan, lenders typically ask for financial statements for the past 2 years. Most lenders check your business's past performance, profitability and financial standing through financial reports.

In some cases, lenders want such reports or P/L statements to be audited. So, check the requirements and prepare for this to avoid delays.

Now that you know some common mistakes to avoid while sending in your small business loan application, make sure to incorporate them. This way, you can secure an affordable loan to take your business to the next level of growth.

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