Businesses are gradually shifting from a slowdown to regaining momentum, especially in India. For small enterprises, bouncing back after a little slumber in the past years depends largely on swiftly attracting new customers and stabilising cash flow to reach pre-pandemic turnover levels. This ensures smooth operations while also allowing room for investment in growth.
To expedite the recovery of your business, one effective approach is to consider applying for a business loan. Such a loan provides upfront capital essential for acquiring stock, hiring additional help, or procuring necessary equipment.
However, it is crucial to be mindful of common pitfalls when seeking a Medium, Small, and Micro Enterprises (MSME) business loan in India. By avoiding these pitfalls, you can enhance your chances of approval and optimise the benefits of securing the loan.
7 Ways to Avoid Making Mistakes While Applying for Business Loans in India
Despite the streamlined application process, instances of business loan rejections or prolonged scrutiny are not uncommon. Prospective borrowers must steer clear of errors that could lead to such outcomes. Additionally, certain missteps should be avoided when selecting the appropriate lender.
Absence of a Solid Business Plan
A comprehensive business plan is crucial when seeking a business loan, as it outlines the vision for the business. This document should encompass growth strategies, revenue projections, market analysis, and winning strategies aimed at future success.
Making Multiple Loan Inquiries
While it may seem prudent to approach multiple lenders, this can backfire significantly. Multiple unsecured business loan inquiries can adversely affect your credit score and raise concerns among lenders about your financial stability.
Failure to Provide Documentation
Conventional financial institutions typically require extensive documentation for loan applications. Essential documents such as bank statements, tax returns, investment summaries, income estimates, and company credit reports must be readily available to expedite the process.
Lack of a Sound Repayment Plan
A robust repayment plan is essential to avoid penalty charges, penal interest, and the risk of collateral forfeiture. Demonstrating a stable income and exploring repayment options offered by the lender can mitigate financial stress.
Insufficient Research to Find the Right Lender
With numerous banks and non-banking financial companies (NBFCs) offering business loans, thorough research is imperative. Factors such as interest rates, processing fees, pre-payment charges, customer service, loan flexibility, and approval timelines should be carefully evaluated to identify the lender that best aligns with your needs. Taking the time to conduct comprehensive research ensures a well-informed decision.
Applying to Multiple Credit Facilities
Another common mistake made by many MSME loan applicants is when they apply for business loan from different credit facilities simultaneously. This tendency often arises when a business is experiencing a shortage of working capital, leading applicants to seek multiple avenues to increase their chances of approval.
However, this approach is not advisable. Simultaneous inquiries for credit solutions can harm your credit report, portraying you as a risky borrower in the eyes of lenders. Therefore, it’s crucial to apply for a business loan carefully, selecting the right option from the outset to avoid unnecessary risks and ensure a smoother application process.
Maintaining Different Loans at the Same Time
Maintaining multiple loans concurrently can be financially burdensome and raise concerns for lenders. It’s unwise to apply for another loan when already juggling several financial commitments. This practice can strain cash flows, potentially signalling financial instability to lenders. Moreover, it may indicate an inability to manage business expenses within existing cash flows.
To mitigate risks, it’s advisable to limit the number of loans and borrow only when necessary. Keeping loans to a minimum ensures better financial management and improves the likelihood of approval when seeking additional financing.
Conclusion
Securing a business loan can be instrumental in advancing your business to new heights. Prior to applying for a business loan, it’s essential to ensure thorough preparedness to minimise the risk of delays or rejection. By borrowing responsibly, making prudent spending decisions, and adhering to timely repayment schedules, you can confidently navigate your financial journey and ensure smooth sailing toward your business goals.
For MSMEs seeking to propel their growth, Non-Banking Financial Companies (NBFCs) emerge as the undisputed champions for securing business loans. Streamlined processes at NBFCs translate to significantly faster loan approvals, which is critical for MSMEs to capitalize on fleeting business opportunities or meet urgent equipment needs.
