Business loans are one of the most important ways to secure money to run a business. While applying for a business loan many people commonly make mistakes. But these mistakes could lead to rejection of the loan application. Let’s understand what these are!
CIBIL Score is the most important when you are applying for a business loan and this will be the first thing the lender will check while processing the application. A higher CIBIL Score (Generally 750 or above) can lead to higher chances of approval, similarly lower CIBIL Score (below 600) lower chances of approval.
What do most people do? Many business owners apply for loans without knowing their credit score, which can lead to unexpected rejections.
A business plan is an important document that explains what your business aims to achieve, how it plans to reach those goals, and what its financial outlook looks like. It includes detailed information such as your business objectives, the strategies you will use to achieve them, and projections of future income and expenses.
What do most people do? Submitting a poorly prepared or unrealistic business plan can lead to immediate rejection.
What should you do? Include an executive summary, market analysis, business strategy, and detailed financial projections.
Accurate and up-to-date financial records are really important for loan approval. Lenders will check every detail related to your financial statements to assess your business’s financial health.
What do most people do? Inaccurate or incomplete financial records can raise red flags for lenders.
Maintain Essential Financial Documents such as:
Income Statements: Shows your business’s profitability over time.
Balance Sheets: Provides a snapshot of your business’s financial position.
Cash Flow Statements: Details the inflow and outflow of cash within your business.
Tax Returns: At least the past 2-3 years of business and personal tax returns.
Some people apply for more money than they actually need, which can lead to their loan application being rejected by the bank. This happens because banks want to see that the loan amount requested is appropriate for the borrower's actual needs and financial situation.
Assess Business Needs: Evaluate your business’s financial needs and calculate the exact amount required.
Consider Repayment Capacity: Make sure the loan amount is within your repayment capacity based on your business’s cash flow.
Collateral can significantly impact your loan approval chances and the terms you receive. If you want to secure a loan with better interest rate and overall better terms and conditions then collateral plays an important role.
What do most people do? Applying for a secured loan without offering collateral can lead to higher interest rates or rejection.
Lenders prefer businesses that have been operational for at least 2-3 years and have a stable revenue stream.
What do most people do? Many startup companies apply for a business loan without having stability and a great source of revenue. Ofcourse, some lenders provide startup loans but in case of lack of revenue as expected, not so growth could lead to rejection.
Failing to understand the terms and conditions of the loan can lead to financial difficulties later on.
What do most people do? Not paying attention to interest rates, repayment schedules, and other terms can result in unfavorable conditions.
If traditional banks are not an option, consider alternative lenders such as NBFCs (Non-Banking Financial Companies), online lenders, or peer-to-peer lending platforms.
Advantages of Alternative Lenders:
Flexible Criteria: Alternative lenders often have more flexible approval criteria compared to banks.
Faster Processing: They typically offer quicker loan processing and disbursement.
What do most people do? Limiting your options to only one or few banks and accepting the offer.
| Mistake | Description | Solution |
|---|---|---|
| Not Knowing Your Credit Score | Ignoring the importance of your credit score | Regularly check your CIBIL score and maintain a high score (750 and above) |
| Failing to Prepare a Solid Business Plan | Submitting an incomplete or unrealistic business plan | Prepare a comprehensive business plan with detailed market analysis and financial projections |
| Not Keeping Accurate Financial Records | Poor financial record-keeping leading to lack of transparency | Maintain accurate and up-to-date financial records |
| Applying for the Wrong Loan Amount | Misjudging the amount needed for the loan | Accurately assess your financial needs and apply for a realistic loan amount |
| Ignoring the Importance of Collateral | Not offering collateral for secured loans | Provide adequate collateral to reduce lender risk |
| Not Understanding the Loan Terms | Overlooking interest rates, repayment schedules, and other loan terms | Carefully review and understand all loan terms before applying |
| Not Exploring Alternative Lending Options | Relying solely on traditional banks for business loans | Consider NBFCs, online lenders, and peer-to-peer platforms for more flexible loan options |
Applying for a business loan requires careful preparation and attention to detail. To improve your chances of approval, avoid common mistakes such as ignoring your credit score, failing to prepare a solid business plan, and not keeping accurate financial records. It's also important to request an appropriate loan amount and offer collateral. By avoiding these pitfalls, you significantly increase your likelihood of securing the necessary funding for your business.
How can EazyBankLoan help you in taking a loan? We understand the process of procuring a loan can be stressful. That is why we take care of your Loan application process, saving you time and hassle by handling the paperwork and communication with the loan providers.
Check the details here at EazyBankLoan
Need help? Reach out at support@eazybankloan.com
A good CIBIL score for a business loan is typically 750 or above.
Improve your credit score by paying bills on time, reducing outstanding debt, and monitoring your credit report for errors.
A comprehensive business plan should include an executive summary, market analysis, business strategy, and financial projections.
Collateral reduces the lender’s risk and can lead to better loan terms and a higher likelihood of approval.
Show consistent revenue and operational stability over 2-3 years.
Alternative lenders include NBFCs, online lenders, and peer-to-peer lending platforms that offer more flexible loan options.
A strong relationship with your bank can lead to better loan terms and smoother approval processes.
Key financial records include income statements, balance sheets, and cash flow statements.
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