Looking for a Business Loan? 6 Things to Avoid Before You Apply for a Business Loan

While dedication, perseverance and hard work play an imperative role in the success of the business, money is one such factor which is equally important, or you can say, holds more value than other parameters. You can either fund your business from your savings or apply for a business loan. With a rise in the commercial lending, it is a good move to apply for a business loan to start a new business or expand the existing one.

While, there is an upsurge in the number of people applying for a business loan, there are also such instances where lenders have rejected business loan applications. Many times, the reason for rejection is not a bad business idea, but mistakes committed by a borrower at the time of applying for a business loan. So, let’s have a look at various mistakes which can lead to rejection of your business loan application.

Business Loan

#1. Ignoring Credit History: A credit history helps in deciding the credit worthiness of business. It indicates how much capable a business is to repay its loan. All banks and financial institutions inspect both the personal and official records of business in order to keep a check on its financial standing.

It comprises of checking the credit card history, mortgages, and credits with other suppliers. Even if your business has a good credit score, a single missed/late payment of your credit card bill can drastically lower your credit score, which can lead to loan rejection.

Tip: To secure a business loan, maintain a good credit history. You can also submit copies from various recognized credit agencies to validate your good credit history.

#2. Low or Weak Cash Flow: A business should have enough cash flow to discharge its daily duties like repaying the loan, utilities, etc.; without hindrance Also, a sufficient fund reserve should be there to deal with contingencies. A weak cash flow indicates towards the financial instability of business. It also means, if the business can’t sustain itself, how will it repay business loan EMI? It can dissuade lending institutions from approving your business loan application.

Tip: Build a proper cash flow and make a habit of parking a substantial part of your profits towards emergency funds.

#3. Failure to Furnish a Good Business Plan: Usually, banks and lenders don’t sanction those business loans which have dim chances of getting repaid. In most of the cases, business owners approach financial institutions without a viable business and revenue plan in place. As a result, their loan application gets rejected.

Tip: A strong business plan shows your future profitability and lowers the risk for the lender. Therefore, give a detailed plan of your future actions to demonstrate your credibility. However, keep your plans as realistic as possible.

#4. Not Submitting Important Financial Statements and Other Documents: Lending institutions assess your repayment ability on the basis of the financial documents submitted by you. Approaching financial institutions without financial statements and documents like permits, licenses, etc.; can lead to rejection of your business loan application. Remember, mismanaged financial statements along with a pile of debts will not impress the lender.

Tip: Review your financial statements periodically and make sure you have all the important licenses in place before applying for a business loan.

#5. Not Maintaining a Minimum Balance in a Business Account: Taking the above point forward, in addition to submitting financial documents, it is imperative to maintain a minimum balance in your business account. The lender will be interested in knowing your flow of cash to ensure you have sufficient funds to repay your installments.

In case, the amount is below the minimum limit as specified by the bank; it is usually a sign that a business is not performing well and it doesn’t have enough money to cover loan repayments.

Tip: Negative and low balance indicate towards the financial instability of business. Maintain a balance slightly above the minimum limit always as it is a sign of a stable business.

#6. Applying for a Business Loan Without Substantial Purpose: Why do you want to apply for a business loan? Is it because you want to purchase a lavish office and decorate it with unnecessary items like luxurious chairs, exotic fish tank, etc.? That all sounds great, but a lender can refuse to issue a business loan for this. A lender wants to make sure that you will use the loan to grow your business so that you can repay them.

Tip: Use a business loan for reasonable real estate purchase, software, product development or on any other thing that can help you grow your business.

Along with the above, there are social, economic, political and technology factors which are beyond your control, but have a substantial impact on your business loan application. In case your business loan application is rejected by a lender, identify the reason and work towards rectifying it. Further, there are some banks which do not sanction business loan without collateral.

However, lenders like Aditya Birla Finance Limited offer business loan without any security. Go with a lender with easy documentation criteria to curtail the chances of rejection of your business loan application.