For continued business operations, maintaining adequate liquidity is essential. However, unplanned expenditures consume most of our cash surplus leaving us cash strapped. Financial crises become inevitable and running of the business becomes difficult. This is when availing loans through a banking institution becomes the need of the hour. However, businessmen and entrepreneurs fear rejection of the loan application further losing credibility in the market. According to researchers, about 60 percent of the loan applications forwarded for starting a new business are rejected. Therefore, we all look forward to having a magical guide to getting business loans. Whether it is a small business loan, loan to offload debt, or to fulfill working capital requirements, a diligent approach towards loan applications is required.
Another point to be noted is that the acceptance and rejection of the loan application are dependent upon several factors. Financial decisions are taken by bankers after undertaking a thorough assessment and investigation of the applicant to ascertain his/her eligibility. At the same time, entrepreneurs hurriedly and sometimes unknowingly commit mistakes during filing applications which can otherwise be eliminated if loopholes are known beforehand.
Here is a guide as to how entrepreneurs can avoid loopholes in the loan process.
Lack of Updated Financial Records: A common mistake that small business owners commit is that they do not maintain the updated financial records of the company. This is because a dedicated accountant is not hired to prepare books for their daily transactions. Owners too lack the required and basic accounting skills to do this job on their own. As a result, filing of loan applications without these documents and half-baked information fails to present the right picture about the company. Unfortunately, the financial position of the company is a key determinant based on which banks gauge how stable the business is before risking a huge sum of money.
To make up for the lack of authentic information, businessmen end up cooking figures to provide a pleasing picture of its operational worthiness. On the contrary, banks can easily verify every transaction and right away reject the application in case a fraudulent event comes to fore. Some discrepancies might still occur but this would not bar you from getting a loan but would still be able to get some amount of loan.
Purpose of Financing: Another mistake that is commonly found in applications is how a banker has to fish for information to understand the key purpose of raising the loan. From the point of view of a lending organization, putting money in a bankable business or the one that would generate profits would be highly desirable. So, lending institutions would have to keep a keen eye on details and how you wish to utilize the funds. Unfortunately, most small business owners or aspiring entrepreneurs lack a well-described idea about the usage of funds. Here you have to act like a seller and make the banker trust in your offering. The point needs to be sound enough to let the banker understand your vision and how you wish to create a positive impact.
Credit Rating: The credit rating clearly outlines how dependable the person is when it comes to payment of bills and debt. If the credit rating is lower and you are not aware of the same, this might lead to loan rejections. The rating can be used as a stepping stone to entrepreneurial success. Higher credit score translates into higher chances of getting loans approved. In addition to this, the timeline of the loan approval is also significantly reduced as compared to those with a low credit score.
Filling Late Applications: There is no substitute for quality in the filing of the loan application. Applications filed in a hurry just to get funds as soon as possible becomes the key reason for rejection. Applicants need to find a lender whose offer the best suit their interests. A part of this process involves looking for right interest rates and repayment schedules. Gauging the urgency of the applicant some middlemen might make you apply loans that have unrealistic repayment cycles and higher interest rates or hidden costs. Taking ample time at hand and submitting loan applications by considering all options prudently might solve the issue.
Applying the Wrong Type of Loan: As the saying goes” One size doesn’t fit all” similarly one type of loan would not meet the requirement of every applicant. Lack of knowledge and callousness of going through the specifications of each loan leads to wrong decision making. It is essential to understand which one would best suit your needs. For instance, to set up a small business, loans such as line of credit, working capital loans, SBA Loan 7a among others are suggested. These loans are easily accessible unsecured loans as compared to other loans and have competitive interest rates.
Other Common Mistakes
Some of the other mistakes made by loan applicants are thinking of business turnover as cash received from sales which are not the case. For disbursing, loans banks look at net profits and cashflows which determine your actual liquidity. Another mistake is of missing mention of other loans that you might have taken.
The Way Forward
The aforementioned mistakes are common with most of the loan applicants and even basic mistakes such as the wrong name, not reading loan terms before the signing of applications, and refurbished documents result in rejection. Though the lending institution is dependent on how the market dynamics (demand and supply conditions) are working, they would still offer loans to all the eligible and worthy applicants. A diligent approach to applying a loan can be the only sure shot way at getting a loan approved. In case you still fail to get accepted, other mediums of short-term loans such as online lending companies can be approached.