When small business owners require urgent funds to cover operational costs or plan to expand the business, a small Business Loan immediately comes to their financial support. These unsecured loans are the best funding sources for SMEs and MSMEs that need finance to buy inventory, hire a marketing team, expand the business, launch a new product line, build working capital, or other purposes. However, getting a Business Loan is a systematic process.
Although most financial institutions have minimal eligibility and documentation requirements, many prospective borrowers may still face issues when they apply for a Business Loan. Below we will discuss a few common issues most applicants face and try to resolve them.
- Poor Credit Rating
The credit score is one of the most vital parameters determining an applicant’s credibility. Lack of diligence towards credit in the past tarnishes the credit report, reduces the credit score, and results in a loan rejection. However, irresponsible credit behaviour is not the only reason for a poor credit rating. Sometimes, there are reasons beyond control, such as disability, critical illness or some other unfortunate accident.
Applicants with a credit score of more than 700 will find it easier to apply for a Business Loan online. Those with a score under 700 must focus on increasing it. Begin by identifying and correcting any errors in the credit report. Additionally, drive down the outstanding debt before applying for a new loan.
- Poor Cash Flow
Cash flow is the cash in hand to repay the loan. Lending institutions usually check this measure to gauge financial health when people apply for a Business Loan. Most NBFCs cannot overlook the flaw of insufficient cash flow. Therefore, it is the first thing one must bring in order before applying for a loan. Calculate the cash flow quarterly and assess the debt service coverage ratio by dividing the net operating income by total annual debt. A higher ratio indicates a buffer in the finances so make sure it is as low as possible.
A business owner must prepare well and get things in order before approaching a potential loan provider to apply for a business loan. That primarily means having all the loan documents ready in hand. Required documentation usually includes identity proof, address proof, proof of ownership, and financial records. Keeping these documents in order minimises an individual’s chance of application rejection.
Careless errors land an application in the pile of rejected papers. Sloppy business practices and inconsistent bookkeeping, such as mixing personal and business bills and not filing IT returns, prevent a Business Loan applicant from getting the required financing. So, take time to gather the necessary details, fill out the forms completely, and double-check before submitting.
Business Loan application is a systematic process directed by concrete documentation and orderly presentation. The more serious and prepared the applicants are when they apply for a Business Loan, the most support they get from the lending institution for loan approval.