Top 6 Mistakes To Avoid While Taking A Business Loan

There has been a massive improvement in the financial literacy of the modern Indian, thanks to the rise of the internet and the increasing interest of the users. However, we are still far away from our western counterparts.

For instance, India is home to almost 1/5th of the world's population with a literacy rate of 80%. However, when it comes to financial literacy, it stands at a not so encouraging 24%. As compared to countries like Australia, Denmark, and Canada where this number is over 65%, there is still a long way to go in being more aware of better financial management.

The situation is even worse for small and medium business owners. As entrepreneurs are dealing with the day-to-day challenges of the business and are focused on keeping the show running, financial literacy often takes a backseat.

The Indian MSME sector employs over 120 million people and continues almost 30% of India's GDP and 45% of India's exports.However, when it comes to making the right decisions in financing their business needs, these entrepreneurs need some handholding.

For instance, according to an analysis by, while there has been an increase in loan applications by small businesses, an increasing number of defaults are being reported in small and working capital loans. It is largely because there is a need for training and awareness in these entrepreneurs so that they can make the right decision for their business, the analysis further reported.

A business loan is one of the most preferred mediums for small, medium, and large businesses when it comes to expanding the reach of your business. However, several mistakes can cost you dearly if not handled properly.

Here is all you need to know about the mistakes you should avoid when taking a business loan: 

What is a Business Loan?

A business loan is the borrowed amount of capital from a lender to meet the objectives of the business. As the name suggests, a business loan is specifically designed to help business owners to meet their additional financing needs to expand their business.

As a business loan is a financial transaction between the lender and the borrower, your idea of taking a business loan for business growth mustn't become another financial hurdle in the organization's growth.

To start with, you should be aware of the objective of taking a business loan and stick to it through the duration of the loan cycle. For instance, if you are taking a business loan for meeting the day-to-day working capital requirements, do not change the goal post once the loan has been granted towards buying new land or machinery. It may be tempting for you to do so, but remember that you need to handle the existing challenges for which the loan is being taken.

There are a few other mistakes that people make when taking a business loan that can cost you and your business in the long run. Here are the top 6 mistakes you should avoid when taking a business loan:

1. Presenting inflated books

One of the worst decisions that you can make when taking a business loan is to present inflated books of accounts to the lender. Inflated books of accounts are where you have intentionally reduced your expenses and increased your revenue on paper to showcase a financial position that appears more prosperous than what it is on the ground. By opting to present inflated books, you choose to show your business is more financially competitive as compared to the actual situation.

You should always present accurate data when it comes to the profit & loss, and balance sheet so that the lender can make a decision based on the actual scenario. The cash inflow and outflow should always be presented as what it is rather than what you aspire it to be. This would help you and the lender to assess the risk involved and gets you the required funding much faster.

By presenting inflated books, you are not only starting your financial transaction with the lender on the wrong foot, but it can also get you into legal trouble. To avoid all this hassle, it is strongly suggested that you present the accurate books of accounts to the lender.

2. Opting for the wrong loan

There are several kinds of loan options available to a business. There are small business loans, business loans that are taken after submitting collateral, working capital loan, loan for buying equipment, start-up loans, business loan for women, etc. You should look at the various options that are available to you as a business owner and what are you trying to achieve by taking a loan.

Your research at this stage would determine the kind of business loan you want to take for achieving your objectives. There are factors like business loan eligibility criteria, loan amount, tenure, interest rate, terms and conditions, etc that should be considered at this stage itself. This would help you get to the right kind of business loan you want to take.

By opting for the wrong loan category, you may end up paying a higher interest with terms and conditions that are not favoring your goals.You need to do your research and not base your decision on the advice of your friends or relatives. What worked for them may not be suitable for you because the two had different objectives to meet.

It is critical to opt for the right business loan to stay focused and on course to achieving your objectives.

3. Inadequate documentation

Any business loan application, like any other loan application, requires you to submit complete documentation related to loan process. For instance, in a personal loan you only need to submit documents related to your personal finances and KYC. Since it is a business loan, documents related to business are also required in addition to the personal documents.

Before submitting the loan application, you should spend some time gathering all the documents that are required by the lender to process the loan application. You must submit complete documentation for taking a business loan.

Typical documents needed for a business loan are the income tax returns of the business, PAN card, bank statements, and KYC and income documents of the directors or business owner. The requirement of documents across various categories of business loans would change and you need to consider the actual requirement before submitting your loan application. You should check the business loan required documents on the website of the lender.

Submitting your application with inadequate documentation will lead to extending your processing time and there will be some back and forth between you and the lender before the application is approved. Also, if you are not able to submit the required documents in time, the lender may even reject your application. Therefore, it is better to spend some time collecting all the required documents before applying for a business loan.

4. Not managing credit score

One of the worst mistakes that you can do before taking a business loan is to ignore your credit score. A credit score is a three-digit number that ranges from 300 to 900 that depicts the creditworthiness of an individual. In other words, a credit score is a number that helps the lender know how you have been dealing with debt in the past. A good credit score increases your chances of getting the business loan on a lower rate of interest and better terms.

If you have not been looking after your credit score before you apply for a business loan, there is a high chance that you will end up getting the loan at a higher rate of interest and stringent terms. On the other hand, if you take steps to improve your credit score, it would help you get a business loan for your business goals at an attractive rate of interest.

For instance, did you know that if you do not have any credit history in the past and are applying for your first debt as a business loan, your credit score would not be very good? As there has been no credit history, it would reflect in your credit score. To build a credit history, you can take a credit card without any annual charge and use it diligently for your expenses. For your credit score to increase, you need to ensure that you are making your due payments in full before the due date.

Before you apply for a business loan, it is good to have a credit history that helps you get the business loan at better terms as compared to a situation where you are unaware of your credit score and its importance.

5. Incomplete details

There has been a drastic improvement in the processing and disbursal time when it comes to processing the application for business loans. However, you need to submit the complete details with the lender so that the application can be processed quickly.

Typical information that is required by the lender is the name of the business, address, business plan, and financial details along with the personal and financial details of the business owner. You are expected to provide all this information to the lender as a one-time exercise. This helps the lender to verify the existence of the business, the plan that you have, and the profile of the business owner.

You need to submit the business loan application with all these details and it would reduce the processing and disbursal time. On the other hand, if you do not share the expected information about the business with the lender, it will only increase the processing time and delay your business plans.

The information that is required varies from one lender to another. It is better to check the requirement at the time of application and cover all points. This would help you in getting quick approval and disbursal to your business loan application.

6. No collateral

It is a common perception that you do not need any collateral for taking a business loan. Hence, business loan for small businesses is usually taken by submitting all the paperwork related to the business and without collateral. However, there is an option available to submit collateral to take a business loan with many lenders as well.

Simply put, a business loan is the additional funds that you get for your business goals and you are expected to pay back the lender the loan amount in monthly EMIs along with interest.

If the loan is secured i.e. backed by collateral, it would help you to get the loan at a lower rate of interest. However, if the loan is not backed by collateral, the rate of interest would be slightly higher. As the lender has lesser risk in the case of a secured loan, you can get one at a lower rate of interest.

In addition, with collateral in place, you can get a higher loan amount as compared to an unsecured loan.

Depending on your requirement and the rate of interest being charged, you should assess if you want to submit collateral with the lender for your business loan. Also, check with the lender if they allow you to take a business loan by submitting collateral and the benefits involved.

Conclusion

These are the top 6 mistakes you should avoid at the time of taking a business loan. It is better to avoid the mistakes outlined above and get the right start. Business loan helps you in reaching your business goals faster with additional funding. You can take a business loan for expanding an existing business or for consolidating existing high-interest debt.

If you are looking for a lender that you can trust, Poonawalla Fincorp offers business loans at an attractive interest rate and zero hidden charges. With a flexible tenure and easy eligibility criteria, you can get a business loan as per your requirement with minimal documentation and instant approval and disbursal.

FAQs

• What is the most important mistake to avoid if you get a loan?

The most important mistake to avoid when getting a loan is failing to understand the terms and conditions of the loan agreement as it can result in unexpected fees or penalties. Additionally, it is crucial to avoid borrowing more than you can comfortably afford to repay, as it can lead to financial strain and difficulties in meeting your obligations.

• What factors affect a loan?

Several factors affect a loan, including the borrower's credit history, income stability, and debt-to-income ratio. Additionally, the loan amount, interest rate, and loan term also play a significant role in determining loan eligibility and terms.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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