Tuesday, November 29, 2022

Business

Mistakes to avoid for getting an affordable Business Loan Interest Rate

Aarti Sharma | September 24, 2022 08:00 AM

If you run a business, small business loans can help you with all of your financial needs. This loan is simple to obtain. However, many established business owners continue to complain that their loan application was rejected. The essay will go over the most typical hurdles to securing an affordable business loan interest rate.  

  1. Inadequate business plan 

Have you ever been in a scenario where a lender rejected your application because of a poor or non-existent business plan? If not, keep reading. Financial institutions, before sanctioning funds, understand your plans. They look at your sales forecast, revenue projections, the region where you want to spend money, and a few other things. If the fund value is higher, the lender may be interested in learning more about your company's shareholding percentage and debt to capital ratio. 

The lender easily issues a business loan to a company where the promoters have vested more of their funds, and the debt to equity ratio is lower. 

  1. Previous debt history 

Never presume that missing a few EMIs will not affect your future borrowing ability. When performing a credit appraisal, the financial institution first looks at your outstanding debt and payment history. They do so to assess the lending risk connected with your profile. Be prepared for loan rejection if they discover you are inconsistent in meeting your monthly debt obligations. 

Furthermore, they monitor your company's account receivables and payables in order to comprehend your liquidity status. You will have trouble obtaining loan approval if your debt to revenue ratio is high and your current ratio is low. 

  1. Exceeding your capability 

Be aware of the loan amount you are filling in the loan application. Many financial institutions make mistakes by writing in any value at random. As a result, the lender will turn down their application. So, what's the advice here? The very first step is to determine how much EMI you can pay. Use a business loan EMI calculator to get the optimum EMI for your situation. Consider your company's cash reserves after you have determined the EMI. Fill out the money value once you are certain of every single point critical for loan payback. 

  1. Not paying attention to eligibility criteria 

Another common misstep made by firms is failing to understand the lender's minimal loan eligibility criterion. As a business owner, you must avoid making this mistake. Go to each lender's business loan page and scroll down to the eligibility column while shortlisting lenders. You can also visit the website of a business loan aggregator to compare the minimum requirements of several lenders on a single web page. 

Most financial institutions have eligibility requirements comparable to the ones listed here. 

  • Only Indian nationals can apply for this loan.
  • The loan is available to self-employed, traders, manufacturers, retailers, etc.
  • As a loan applicant, you must be at least 21 years old and no older than 65 years old.
  • Your company must have been in operation for at least five years and generate a sufficient profit. 

Once you meet the above criteria, the lender then evaluates your debt-to-revenue ratio, financial records, etc., to determine the loan value.  

  1. Insufficient collateral 

Business loans come in both secured and unsecured forms. Some of the most widely used secured business loans are working capital loans, equipment loans, bill discounting etc. Assume 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 computes the worth of the underlying assets, it discovers that it is roughly Rs 60 lakhs. In this situation, the lender will reject your application right away, citing insufficient collateral as the reason. 

  1. Multiple loan applications 

Never apply to more than two financial institutions at the same time, no matter how urgently you require funds. It gives lenders and credit bureaus the appearance that you are a hungry borrower. It also informs them that if you are authorised for funding, you would be unable to pay your EMIs due to a lack of strong financials. The scenario further leads to a drop in your credit score. 

The word of caution here is to wait for the lender to approve or reject your application before proceeding to the new financial institution. In the event of rejection, try to figure out why. Once you have identified the cause, work on improving it and wait for a few months before submitting a new application. 

  1. Not reading the fine print 

When the lender approves your application, they draft a loan agreement for you. The contract contains minute specifics about business loan interest rates and other details. A few of them include foreclosure conditions, late fees, rescheduling terms, etc. Ignoring these points could lead to problems in the future. 

To conclude 

Avoiding the above mistakes while applying for a loan increases your chance of securing an affordable business loan interest rate. The suggestions above also ensure that you do not run into any problems due to hidden provisions in your loan agreement.

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