6 Silly Business Loan Mistake to Avoid
As an entrepreneur or a small business owner, the first thing that comes to your mind is funding. You need credit to start and run your business. There are several ways to get funding for your business and the best way is to get a business loan. However, due to immaturity and lack of confidence, business owners commit some mistakes while applying for a business loan. Avoiding some silly mistakes can increase your chances of getting a business or MSME loan.
In this article, we will explain the silly business loan mistakes that one must avoid.
Failure to make a business plan
A well-drafted business plan plays an important role in getting funding. Lenders analyse business plan seriously to see if it has the potential and will you be able to repay the business loan. Nowadays you can apply for a business either through a website or loan app. But, if you fail to plan properly and impress the lender, your application may get rejected. Be clear about your business idea. Discuss with your partners and sort out the doubts. Prepare a plan that should include the following aspects:-
- How many funds do you need?
- In which areas you will have to invest more money?
- How will you manage your expenses?
- What are the profits you are expecting from the business?
Either you are applying for an MSME loan or term loan; you must have all the required documents. Incomplete paperwork increases this risk of loan application rejection. Ensure that your loan application package contains tax returns, P&L statements, business plans, credit score, and bank account records. Lenders want to give money to competent businesses. Submitting incomplete paperwork may sabotage your plan of getting funding.
Too much overdraft
Lenders analyse your business bank account statements to find out if there are insufficient funds charges. Too much overdraft or negative balance will decrease your chances of getting a small business loan. Entrepreneurs are more involved in ideation, thus they should hire a financial expert or an accountant to look after their revenue and expenses. A good looking business bank account will increase your chances of securing an MSME loan.
Neglecting a good credit score
Always keep a check on your credit score. A credit score below 700 decreases your chances of securing a business loan. Borrowers should keep on checking their credit scores on trusted lender’s loan apps. Pay your EMIs and credit card bills on time to maintain a high credit score.
Applying for several loans
If you’re planning to expand your business, then don’t apply for several loans at once. Applying for several loans may reflect in your credit score. It may increase the chances of rejection of loan application. Make sure to wait for a minimum of 6 months to apply for another business loan. If you apply for more than one loan at a time, then you must be able to provide past documents of successful repayment. You should be able to project that you have a profitable business.
Not making the right and timely decision
If you are planning to start a business or expand your existing business with a business loan, you must plan everything. Delay in applying for a business loan is like not applying at all. Applying for a business loan at the last moment will lower your chances of getting approval. Plan your requirements, manage funds, pay bills, and keep all documents ready, beforehand. Proper preparation can increase your chances of getting a business loan with a lower rate of interest.
Frequently Asked Questions
What is the most likely to cause a lender to deny a credit?
Banks often reject business loan applications due to poor credit scores. Most banks have a set credit score limit and failing to meet that limit can cause immediate denial to the loan application.
Does getting rejected for a loan application hurt your credit score?
Getting rejected for a business loan does not impact your credit scores. Lenders review your credit report when you apply for an MSME loan. This inquiry can hurt your scores a little. Improve your credit score before you apply for a business loan again.
How long a declined loan does reflect on your credit file?
A declined loan inquiry stays in your credit file for two years. Your credit reports do not maintain a report of your business loan rejections.
How many inquiries can harm your credit score?
Six more inquiries for business loan applications can harm the credit score seriously.