7 Mistakes to Avoid While Applying for a Business Loan

Small business owners often rely on loans to finance their urgent business expenses. A range of loans and credit instruments can help firms navigate their financial requirements. Whether you apply for unsecured business loans or a loan against collateral, you need to avoid some critical mistakes. The loan application process involves several steps and multiple aspects. Hence, it is imperative to be cautious and avoid errors before and during this process. Let’s identify the seven common mistakes to steer clear of while applying for a business loan!

1. Failing to Formulate a Comprehensive Business Plan

Lenders assess different aspects of a firm’s stability before approving loans. A comprehensive business plan can provide a snapshot of the firm’s future potential. A detailed business plan allows lenders to evaluate the feasibility of an organisation’s business proposition and analyse its prospects. Therefore, you should prepare a structured business plan to explain your vision, model, and execution strategies to lenders. Any business owner applying for loans must be prepared with their business plan details.

2. Not Maintaining Up-to-Date Financial Records

Loan providers conduct stringent checks to evaluate the financial stability of enterprises seeking loans. Hence, you should maintain regular records of financial transactions and updated financial statements. The following are some key statements to update:

• Balance Sheet
• P&L Statement
• Latest BAS Statement
• Tax Returns
• Cash Flow Projection

If you apply for a business loans, the lenders rely heavily on your cash flow and other financial statements to determine the risk factor.

3. Not Checking Your Credit Score

Checking your credit score can help you gauge your creditworthiness. As a result, you can understand your credit worthiness and identify the right business loan product and lender to assist you with your loan requirement. This aspect can help you streamline your search for a suitable business loan.

4. Not Considering What Type of Loan You Need

Many small business owners apply for loans without analysing their requirements. You can consult a finance brokers to understand what type of credit instruments will suit your needs. For example, if you need a solution for short-term cash flow issues, a short term business loan may be a good  option. On the other hand, asset finance can be the perfect solution for buying an equipment.

5. Not Assessing the Full Cost of a Loan

A business loan may involve different costs like application charges and repayment fees in addition to the interest amount. You should always consult your broker to assess the full cost of a loan before making a choice. Not accounting for the total cost can lead you to incur unexpected expenses later during the loan term.

6. Not Accounting for Prepayment Penalties

Often, business owners feel that repaying a loan before the stipulated term will help them save money. While this may be true in some cases, prepayment penalties can come into the picture and affect your expenses. You should always read the terms and conditions of your business loan to identify prepayment penalties. Then, you can design your repayment strategies accordingly!

7. Failing to Create a Repayment Plan

A structured repayment plan can help you pay the instalments consistently on time. As a result, you can keep your business credit score up and avoid financial difficulties in the long run.

If you have plans to apply for a business loan, contact the Broc Finance team and take their help today!