Business Loan Mistakes to Avoid

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Business Loan Mistakes to Avoid

  • Highlights

  • Not having a proper business plan in place

  • Having a sketchy history of past lending records

  • Borrowing more than you can afford

  • Not understanding the loan agreement fully

Business Loans provide a much-needed boost to accelerate your business. They are offered by both Banks as well as RBI regulated Non-Banking Financial Institutions(NBFC). Yet availing a Business Loan can be a complex process! But the process can be simplified by avoiding certain common mistakes

Inadequate business plan

When you approach a lender for a Business Loan, they have 3 main questions -
- How much money do you need?
- How will you use the funds?
- How will you repay the loan?
An ideal business plan will be well equipped to answer all these questions. Include key pointers like operating cost, expenses, earnings, profit and future potential.

Provide CA audited copies of your firm’s profit & loss statement, balance sheet and cash flow statement and income tax returns.

Past defaulter records

Business owners often underestimate past overdue. But this is an important point of consideration for financial institutions. Your past records help them calculate the risk profile associated with your company. Maintain a timely payment cycle for accounts receivable, business credit card bills and invoices to boost loan approval chances.

Borrowing more than what you can afford:

Before you apply for a Business Loan evaluate your current financial situation. Calculate the amount of EMI payable, consider how much can you afford to pay, borrow only what you can pay back.

Low credit rating

Business Loan eligibility criteria differs from lender to lender. But all financial institutes consider your credit score while processing your application. High credit ratings can help you negotiate the loan interest rates.

Ignoring fine print

Once the loan is sanctioned, go through the documents carefully. It is not at all advisable to sign any legally binding document without reading and understanding it. If you encounter any jargon, consult a financial advisor to gain a better understanding.

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Low liquidity

Lenders consider your company liquidity ratio to assess your loan eligibility. Liquidity is denoted both by cash at hand and cash at bank. Borrowers maintaining adequate cash balance, stand a better chance of availing Business Loans.

Collateral

Most financial institutions do-not provide collateral free, unsecured loans to new businesses. So, before you apply for a loan, figure out what will be your collateral! The collateral that you choose should cover the loan amount you seek.
However, businesses with a maturity of 3 years and more, certain NBFCs are now offering collateral free Business Loans.

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