As a business person or a person who dreams to become an entrepreneur always things about the fund to start and run the business. There are several ways to mobilize fund and the best way is to apply for a loan. However, anxiety or immaturity or even overconfidence makes a person slip while applying for a business loan.
This article will focus on addressing that silly yet 7 common mistakes done by people who avail the business loan. Also, some suggestions to avoid doing them are listed.
All those who are here, reading this article will get some light about the right way to avoid making mistakes while availing new business loans.
Before understanding the mistakes and the ways to correct them, business owners must know the survival of business establishments operated by entrepreneurs by the opening year.
Take a look at the Bureau of Labor Statistics which has provided details about the American small business survival. This is applicable to all businesses across the globe. In order to increase the survival rate and succeed in business continuously follow these tips.
# 1 Mistake – Failing to make a business plan
How to Avoid – It goes without saying that planning is crucial in every activity. Needless to say, when you decide to start a business or expand an existing one, you must have a proper vision.
mUnderstand your strengths and play on the same. It is easy to apply for a loan in this internet era you will get money at one click. But, if you fail to plan properly, then you will land up not able to repay the loan.
Write a plan for your business. How many funds do you need? Which areas will consume more money? How will manage your expenses? What return you expect from the business.
You will have these thoughts in mind and no doubt about that, still you need to write them and discuss with partners if any. Brainstorm thoroughly and then decide on the amount to be borrowed for your new business.
# 2 Mistake – Financial statement is not prepared
How to Avoid – Ok, agreed that for your business loan application you have prepared a fool-proof business plan. This will convince the banker.
Do you think only this document will suffice to lend your money? No, the formalities are long and the primary one is verifying your financial statement. Yes, this is the document that reflects your professionalism in the past.
Even if you are applying for new business loans still you need to submit your financial statement.
The financial statement must include your capitals, minimum 6 months bank transactions, tax returns filed for at least 2 years, your profit-loss statement, movable, and immovable assets details etc. Before applying for a loan you can get these papers ready to save time.
# 3 Mistake – Loading with several loans
How to Avoid – It is good to approach several loans in one go to expand the business. But that will get reflected in your credit score. Hence there are chances of your loan application getting rejected.
Play it safe and apply less number of loans at a time to get it approved. Wait for minimum 6 months duration to apply for another loan which will help lenders understand your credibility.
Even if you apply for more at one time, then make sure you are able to provide documents of successful repayment in the past. If your business profitable, then you will be able to achieve this.
#4 Mistake – Overlooking utilities and bill payment
How to Avoid – Many think that bill payment and lending business loan are two separate entities. You are wrong, and banks check your expenses payment summary to assess your financial status.
So have a clean habit of making payment for utilities and bill which will reflect on your documents. This will help you get the loan promptly.
#5 Mistake – Failing to make a decision at the right time
How to Avoid – the Delayed decision of applying for a business loan is equal to not applying for the same. You need to plan your needs, manage your funds, pay your bills, keep all papers intact, and apply for a loan in advance. Applying at the last minute will prevent you from getting the loan approved.
If you have an entrepreneur mindset, then right from the beginning you need to plan and collect all documents to apply for a business loan. Forbes has listed the 7 steps to get ready for applying for the business loan.
#6 Mistake – Lack of awareness of credit score
How to Avoid – Credit score of 700 and above will stand a sound chance to fetch your business loan. Check with one of the major agency like TransUnion to know your credit score. Credit score decides the risk that the lender will have in giving you money.
If you are new to credit score, then understand it is calculated by the agencies primarily focusing on the following details.
|Criteria||Weightage in %|
|Length of History||15|
|Types of Credit||10|
With this breakup, you must get an idea of what is to be done to maintain a decent credit score. Focus on your payment history and amount owed as it largely influence your score. Talk to experts about all these details to get approval for your business loan.
#7 Mistake – Making a decision in haste
How to Avoid – Failing to take a decision at the right time is a common mistake means, making one in haste is equally another common mistake. When you take a hasty decision, then you forget to give importance to trivial details like hidden fees, and other terms printed on the loan agreement form.
These hidden fees commonly include the clerical, application, agreement, and commencing costs etc. These will get deducted from the loan amount and you get a less capital amount than you expected.
You might have made a great business plan keeping the loan in mind. The amount that got deducted might hamper your entire execution.
Therefore make sure to read terms carefully and understand the amount you get in hand. For achieving this you need to take time to check details before accepting the loan approval.
Wrapping up thoughts,
Overall, if you look at the mistakes they seem to be very common. It could be not reading terms or sitting on the decision for a long time. Overlooking the bill payment or not making a proper plan. Still, these are the mistakes that prevent you from getting business loans approved. Follow these simple tips given to avoid making silly mistakes when availing loan for your business and grow your business constantly.