Getting the nod for a business loan is not easy at all, particularly if you are a start-up. You will need to prove that your business has the potential to generate enough revenues to keep up with instalments. You will have to submit many more financial documents to meet the eligibility criteria.
As a well-established business, you do not have to go through a myriad of formalities, but you will be asked to jump through hoops when you need money for a start-up. Lenders will typically emphasise a business plan and your own credit score.
Business loans are not that small, so a lender cannot hurry to lend you money. If they do so, you will get into trouble down the line. To ensure a smooth process of funding your business, it is crucial that you do not make the following mistakes:
- Lack of a business plan
Lenders need a concrete business plan that should explicitly explain the vision of their business. They do not have an idea whether or not your business will come through, and your repayment ability hinges on this fact. It must highlight the growth prospects and profit projections by discussing the winning strategies after the market analysis.
If a lender cannot see clarity on how you will start generating revenues and how soon, they will be reluctant to sign off on it. Secondly, you will have to tell them what your plan B is when plan A is a no-go and how you will adhere to payments unless you start generating profits.
A concrete business plan shows solemnity, and this helps a lender mull over. When your business idea is impressive and worth making money, it will likely give the green light even if your application is slightly weaker in other aspects.
- Not doing enough research
Business loans are very widely available, meaning several banks and direct lenders provide these loans. The features of these loans are more or less the same for all lenders, so you may not bother about researching. But this is where you slip up.
In order to ensure that you get the most suitable deal, you should carefully check the interest rates, processing fees, pre-payment charges, customer service, maximum loan sizes, and ease of application. Before you take their words, you should evaluate what their active customers have their feedback about it.
Check Google reviews. Trustpilot is the best platform where you can read reviews of a lending company. Although lenders boast about their interest rates to be competitive, they are not always. Not all customers will say positive things about a lender, but they are good to consider as long as they have got at least a 3.5 credit rating.
- Having a bad credit score
For established businesses, unless they are self-employed, business credit scores are used to make a decision about lending. Since you are a start-up, your business will not have a credit score. Now the lender will look at your personal credit score.
A higher credit score will speed up the application process. However, you will likely be denied if you have a blemished credit report. A few lenders might lend you money but at unattractive interest rates.
Take care of your credit report, and if its health is not good, you should fix it.
- Avoid having too much debt at the time of applying for a loan. Remaining free from any debt will make it easier to process the application. If you took out loans for the unemployed, they must have been cleared by the time you take out a business loan.
- Keep an eye on your debt-to-income ratio and credit utilisation ratio.
- Be careful about identity thefts and other red flags.
- Having multiple loans is not admired by lenders. Most of your money will be sucked by other debts, leaving you cash-strapped for your business loan payments.
- Do not frequently apply to multiple lenders because this implies that you are in desperation. Further, hard inquiries will ruin your credit score, making it worse to avail of attractive interest rates.
Higher interest rates will accrue if you end up with start-up business loans with bad credit. You must have the potential to pay instalments even if your business fails to generate profits.
- Not taking advantage of the cooling-off period
Lenders will give you a cooling-off period that may be up to 14 days to refuse the loan. You are given this much time to go through the contract and consent to all terms and conditions. If you do not sign it, the offer will automatically be repudiated.
Most of the time, entrepreneurs sign and get the amount in their bank account. But you should carefully read the contract. Keep remembering to read the fine print. Lenders are not bound o disclose everything about loans they offer, and they do not. As the rule goes, let the buyer beware, it is your duty to read all terms and conditions carefully.
You should read the fine print to avoid reel in shock later. If you have any doubts, you are free to ask the lender. If you still feel that it does not consist of what you were told before, you can decide not to sign it. There is no provision to pay any fees or penalties.
The bottom line
Applying for a business loan is certainly trickier than a small emergency loan. Lenders follow stricter criteria to give the nod on these loans. You should make sure that you have a good credit score. In case of a less-than-perfect credit score, you should fix it.
Have all your documents ready, so you do not face unnecessary halts in the processing. Read the term of the contract and, in case of confusion, ask for clarity.
Do not sign until you have read all terms and conditions. Do proper research before applying for a business loan. Use comparison sites to pick the best deal on these loans.
Anna Johnson has more than 11 years of experience in direct lending industry of the UK. She is the Senior Content Editor at 24cashflow where she is leading a large team of loan experts. During her career, she has helped the loan aspirants to use the particular loans in the best way and improve their financial lives and status.
Anna Johnson is known for her in-depth research of the UK loan marketplace, as she has worked with many major lending firms in her career. During her educational phase, she has done a research on ‘Finance Fundamentals for Growing Business’.
