30-June-2016 written by : FSI-Team
Starting a business and running it requires a lot of conviction, risk appetite and of course a lot of preparation. Some part of the preparation is devoted to getting the finances in place too. While some contribution from one’s own kitty is a must, there are lots of institutional lenders that are willing to lend for small businesses provided the prospective entrepreneur or in case of an already existing business the owner complies with the requirements set by the lender. However the borrower must be careful and avoid the following mistakes when planning to take a small business loan:
Not Comparing Enough: Before one applies for any kind of loan it is very important that they do their homework well, check about interest rates, other expenditures and fees, loan tenure and documents required. One should zero in on few lenders only after shopping around a bit. So whether its car loan rates or business loan rates it is important to compare yet not base your decision only on interest rates.
Improperly Maintained Books: When it comes to business loans the lenders will sanction it based on the accounts and numbers they see in front of them. Thus not having properly maintained accounts or shoddy statements could be a big impediment when applying for a business loan.
Not Having Enough Reserves: Investing your own funds in business does make sense and you could end up saving the interest costs but spreading yourself thin is not a mistake you can afford to make. So make sure when you use your funds there is sufficient amount left as reserve with you that can come in handy in case of an emergency.
Borrowing more than what is Required: While keeping reserves for yourself is important, on the other end of the stick is the error of borrowing more than you require. Remember there is the interest cost that one has to bear in case of any loan. Make an accurate assessment about your requirement and your EMI bearing capacity before borrowing.
Too Much Dependence on Credit Cards: Credit cards offer the user short term borrowing option without having to pay interest in case the dues are paid within the stipulated period. However too much dependence on the credit card could make the applicant over leveraged, not to mention a high credit utilization ratio which would be bad for your credit health. When filling the credit card application ensure that you keep an eye on your credit limit so that you are aware of how much to spend on the credit in each cycle.
Not Giving Enough Attention to the Fine Print: Some lenders may advertise that there is no processing but later you may realize that some other charge has been hiked. Similarly clarify facts like whether it’s a floating or fixed rate loan, what are the penalties for default, what qualifies as default and if there are any pre payment penalties and so on.
A Sloppy Business Plan: Unlike an auto loan or a home loan which is given against an asset a business loan is given based on the business plan. Thus before you approach the lender make sure you have your business plan is well laid out and well planned.
Ignoring Alternative Sources of Credit: A business loan is given for the purpose of business but that is not the only source of funds that can be tapped. One could explore the option of borrowing against an asset one has, extending a line of credit, overdraft and so on. The choice will depend on the amount required and for how long it is required and of course what are the interest costs.
Improper Documentation: Lenders require a host of documents for sanctioning any loan and more so for a business loan. Banks generally require document like Proof of Business Continuation, Sole Proprietor Declaration or Certified Copy of Partnership Deed, Certified true copy of Memorandum & Articles of Association (certified by Director) and Board Resolution apart from the KYC requirements for the applicant. Keeping these documents ready before actually applying for a loan is helpful as the absence could lead to the application being rejected.
Not Giving enough Attention to Credit Score: Despite the fact that business plans are important for getting a business loan, the borrowers’ personal credit health is also important. So before you apply for the loan check your CIBIL Report to ensure that you have no pending and default in it. Look for ways to improve your credit score before actually applying for a loan.
For anyone planning to borrow for their business the above mentioned pitfalls are best avoided so that you can make the best of your opportunities.