If you run a business, small business loans can help you meet all your financial needs. This loan is simple to obtain. However, many established business owners continue to complain about their loan application being rejected. The essay will go over the most common obstacles to getting an affordable business loan interest rate.
- Unsuitable business plan
Have you ever been in a scenario where a lender rejected your application due to a poor or non-existent business plan? Otherwise, keep reading. Financial institutions, before sanctioning funds, understand your plans. They look at your sales forecast, your revenue projections, the region you want to spend money in, and a few other things. If the fund value is higher, the lender may be interested in knowing more about your company’s equity ownership percentage and debt-to-equity ratio.
The lender easily grants a business loan to a business where the promoters have invested more of their funds and the debt ratio is lower.
- Debt history
Never assume that missing a few EMIs won’t affect your future borrowing power. During a credit assessment, the financial institution first examines your outstanding debt and your payment history. They do this to assess the loan risk associated with your profile. Be prepared for a loan rejection if they find out that you are not meeting your monthly obligations.
Additionally, they monitor your business accounts receivable and payable to understand your liquidity status. You will have a hard time getting approved for a loan if your debt ratio is high and your current ratio is low.
- Exceed your abilities
Be aware of the loan amount you are filling out in the loan application. Many financial institutions make mistakes by entering any value at random. As a result, the lender will deny their request. So what’s the advice here? The very first step is to figure out how much EMI you can afford. Use a business loan EMI calculator to get the optimal EMI for your situation. Consider your company’s cash reserves after determining the EMI. Fill in the monetary value once you are certain of each critical point for loan repayment.
- Not paying attention to eligibility criteria
Another common mistake businesses make is not understanding the lender’s minimum loan eligibility criteria. As a business owner, you should avoid making this mistake. Go to each lender’s business loan page and scroll down to the eligibility column while pre-screening the lenders. You can also visit a business loan aggregator’s website to compare the minimum requirements of multiple lenders on a single webpage.
Most financial institutions have eligibility criteria comparable to those listed here.
- Only Indian nationals can apply for this loan.
- The loan is available to freelancers, traders, manufacturers, retailers, etc.
- As a loan applicant, you must be at least 21 years old and no older than 65.
- Your business must have been in operation for at least five years and generate sufficient profit.
Once you meet the above criteria, the lender then assesses your debt-to-equity ratio, financial records, etc., to determine the loan’s worth.
- Insufficient guarantee
Business loans come in secured and unsecured forms. Some of the most widely used secured business loans are working capital loans, equipment loans, bill discounting, etc. Suppose you want Rs 1 crore to cover your inventory and other operational obligations. You apply for a working capital loan with the desired loan amount. When the financial institution calculates the value of the underlying assets, they find out that it is around Rs 60 lakhs. In this situation, the lender will reject your application immediately, citing insufficient collateral as the reason.
- Multiple loan applications
Never apply to more than two financial institutions at once, no matter how urgent your needs. This gives lenders and credit bureaus the appearance that you are a hungry borrower. He also informs them that if you are allowed to get funding, you will not be able to pay your IMEs due to lack of strong finances. The scenario further leads to a drop in your credit score.
The word of warning here is to wait for the lender to approve or reject your application before proceeding to the new financial institution. If not, try to understand why. Once the cause is identified, work to improve it and wait a few months before submitting a new request.
- Don’t read the fine print
When the lender approves your application, they write a loan contract for you. The contract contains minute details on business loan interest rates and other details. A few of them include foreclosure terms, late fees, rescheduling terms, and more. Ignoring these points could lead to problems in the future.
Avoiding the mistakes above when applying for a loan increases your chances of getting an affordable business loan interest rate. The suggestions above also ensure that you don’t run into any problems due to hidden provisions in your loan agreement.