Common mistakes while applying for a business loan and how to avoid them
Applying for a small business loan can be agonising if you are not sure about what you need to do or how to get the funding with minimum hustle. Whether you need funds for expansion or to boost your cash inflow, securing the required capital can be a tremendous breakthrough for a small business owner.
However, to successfully obtain a loan, you will need to determine what lenders want and then build your case accordingly. Keep in mind the 4Cs that most lenders consider while looking at your business loan application.
Cash flow: Lenders look to fund businesses that have a steady cash flow. A steady cash flow showcases you can repay. It is very unlikely you will get funded if you don’t have a stable business.
Credibility: While your credit score represents the creditworthiness of your business, your potential lender will look at other aspects to ascertain your ability to repay the loans.
Character: Lenders need to know that you have a good financial character. They need to be assured that you will pay the loan in full and on time. Be honest and forthcoming about your past loans, any defaults, and reasons for the same.
Collateral: Some lenders might need you to own collateral though it is not directly linked to your loan for business. They need to know that you have some form of asset that can help them recover the amount in case of default from your side.
While most applicants follow the broad guideline mentioned above, there are some nuances to take care of to avoid rejections.
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Below are the top 5 common mistakes you must avoid as an SME owner.
1. Applying with the wrong lender
While business owners are always looking for the right business loans, they are not sure which lender to approach and if they meet the requirements. Different lenders have different criteria and it is vital to apply to the right kind of lender based on your business needs. Lenders usually consider several aspects of the borrower’s profile and may set a minimum requirement, which could be an annual income, or a good credit rating or others. Not being thorough with the requirement and randomly applying with the wrong lender, results in rejection.
How to avoid this?
Do your homework - Check all the eligibility criteria and requirements before applying for a loan for your business. You must ensure to check the minimum required credit eligibility, industry criteria, loan amount, and other requirements of your potential lender.
You can always talk to our loan specialists to know more about lender requirements. Speak to a lending specialist by filling out the application form.
2. Insufficient documentation
It has been observed that most of the loan applications get rejected mainly due to this single factor – lack of sufficient documents. Missing even the smallest details could result in rejection. If a lender can’t verify your details, they won’t be confident offering you a loan.
What is the solution?
Get your paperwork in order - Documentation plays a significant role in getting a business loan approved. Most lenders post the required documents on their websites. You can go through them thoroughly and tick them off your list when submitting the loan application. The lenders mostly require bank statements, business plans, ATO papers, and a few other details. You also need to share details of any current loans and commitments that are not reflecting in your bank statements.
3. Lack of a proper loan utilisation plan
It is not uncommon to see a small business owner without a formal business plan. But there is a huge chance of your business loan getting rejected if the lender is not clear about your business plan and capital requirement.
What to do?
Devil is in the details - When it comes to qualifying for a business loan, there’s no one-size-fits-all. While you might think you need a perfect credit score and high annual income to get the best small-business loan, most lenders consider several other factors such as - how do u plan to utilise funds. Consider devoting time to this and work on planning how you intend to use the amount you want to borrow. Instead of saying that you need $10,000 for working capital, let your lender know that you intend to use specific amounts for various purposes to grow your business. For eg., $5000 for new machinery, $3000 for salary and $2000 for marketing.
4. Providing incorrect or insufficient information
While filling out the loan application for business loans, someone might advise you to magnify the revenue and shrink the expenses of your venture. While you may think it will make you look more profitable, you are probably blowing up your chance to get your loan approved. Why? Because, before approving the loan, lenders review and analyse the applicant's bank details and accounts. Lenders tend to compare bank statements, ATO papers, and other documents you might have submitted. Any significant mismatch might raise red flags, leading to rejection of your loan application.
What to do?
Double-check - While filling up an application for business finance, two mistakes are quite common. One, mismatched information; Two, missing details. All your details should be accurate and exhaustive. They want to know your business needs and the way this business finance is going to fulfil those needs. This will help the lender to get insight into your plans and make him more inclined to giving you a business loan.
5. Do it yourself (DIY) approach
We often feel we don’t need expert advice, but it is always best to take a professional help when applying for a business loan. There are times when SME owners have lost out on loans, only because they didn’t follow the right advice.
What to do?
Trust the experts - Once you’ve finished writing a business plan with financial projections and ensured fiscal responsibility, it’s important to discuss your needs with a lending specialist before you submit your application. Get a bird’s eye view of all your options to weigh each of their pros and cons, understand and apply for success.
As a small business owner, there are different loan options that you can choose from. Here is a detailed guide to small business loans that can help you secure the right financing for your business.
Before you make any decision, it is advised that you speak to a specialist who can understand your business and suggest the right loan options suited to your needs. At Capital Boost, our lending specialists can help you prepare better to increase your chances of loan approval. Speak to our lending specialist by filling out the application form here. You will hear from us soon.
Tagged in: Business Loan, Small Business Loan, Unsecured Business Loan, Loans for Small Business, Australia Business, SME Loans
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