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Things to avoid when applying for a small business loan

by Alinamass

Funding is an essential component of any business. If you intend to expand your company’s operations, you will need a considerable amount of money, which you may be able to obtain through a small business loan. Despite the fact that this loan is easily accessible, you must avoid certain things in order to obtain an affordable unsecured business loan rate.

  1. Poor credit report

Never overlook your personal and business creditworthiness while submitting your small business loan application. A credit record is a document that assists financial institutions in determining whether or not you have been disciplined in the past when it comes to debt repayment. The lender examines your previous EMI patterns, credit length, negative remarks, and hard enquiries using this report. If your credit record is not found to be satisfactory, the lender will either turn down your loan request or approve it at a high unsecured business loan rate.

In order to make things easier for you, keep yourself updated with any changes made to your report.

  1. Lack of business plan

It is true that financial institutions do not require you to explain why you are applying for a small business loan. But that doesn’t mean they are not interested in learning about it informally. The lender requires you to provide details about your sales projections, revenue forecasts, existing financial records, and so on when you apply for this loan. They may also want to know which projects you plan to use the funds for.

If you are unsure how to create a business plan, you can seek professional assistance. Ensure that the business plan is prepared after gathering information from various departments such as marketing, revenue, and so on.

  1. Lack of collateral

Many people understand that small business loans are an unsecured form of funding. This is undeniably correct. However, such conditions apply only to those who have a consistent profit and have never missed an EMI payment. However, if you are having difficulty keeping up with your revenue or have defaulted on any small loan five years ago, meeting the lender’s minimum qualifications will not get you approved for a loan. This is where you will need to provide a business asset as collateral to assure the lender that they will not lose their funds.

Collateral protects financial institutions against potential risks. Even if your company faces uncertainty and revenue drop significantly, resulting in EMI non-payment and default, the lender will be able to recoup their losses.

  1. Limited cash flow

Never underestimate the potential of your business cashflow. Your company’s cashfow reflects your business liquidity position. The lender gauges your cash inflow to understand if you maintain enough cash on hand to deal with uncertainty. Let’s understand this with common example.

Assume your company makes a profit of around 25 lakhs per year. The profit figure given here is calculated after deducting all expenses such as staff salaries, payments to creditors, and so on. Do you believe you will be able to deal with any short-term uncertainty if you invest the entire profit amount in stockpiling and purchasing business assets without keeping anything with you? Perhaps not. So, how do you expect the lender to disburse the funds if your financial situation isn’t strong enough to handle the EMIs?

As a result, if you expect the lender to disburse funds at a lower unsecured business loan rate, you should first focus on maintaining your company’s cash flow position.

  1. Multiple applications

Panic is very common in a business during a financial crisis. However, if you apply for a small business loan with multiple lenders at the same time in a panic, you are making a mistake. If you are unsure of why this action is a big “NO,” keep reading. When you submit too many loan applications to different leaders in a short period of time without waiting for any of them to provide you with information on whether or not you qualify for a loan, the credit bureau views your business as risky and lowers your credit score.

Remember that when you submit a business loan application, financial institutions conduct extensive research on your profile and request financial information from the credit bureau. Such inquiries are known as hard inquiries, and they are known to lower credit scores.

To Conclude

Obtaining a lower unsecured business loan rate is not difficult as long as you plan your business finances properly and pay your existing loan EMIs on time. Also, make certain that the business plan you are creating contains no irrelevant information. Obtaining approval is simple if you do this many things.

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