When it comes to alternative financing for enterprises, both large and small, a business loan serves just right. It comes with a scope of financing all types of business expenses, and has the potential for high-value financing.
This allows business persons the flexibility of choosing what to fund and how much to fund as per their needs. Availing these advances has become quite convenient these days as well. Their collateral-free nature means no asset security is required and financing only against a few simple eligibility requirements.
Lending institutions have further simplified the process of financing these loans with minimal paperwork involved requiring only a few essential documents.
Nevertheless, it does not mean you are relieved off fulfilling a few essential criteria which keep your financing foothold strong. Borrowing businesses often, out of ignorance, or due to a lack of necessary information. Proceed to avail the loan with a few errors in their borrowing profile or take wrong steps.
Such instances may not only delay loan availability but may altogether hamper one’s chances of receiving loan approval. We have brought you a list of factors that are best to avoid for easy approval of the collateral-free business finance.
1. Low Credit Score
A borrower’s, whether it is a business or an individual, financing credibility is determined with the help of her credit score and history. The score is a 3-digit number derived from the history created through their previous credit habits. A credit score of 700 and above is considered good for the purpose of financing.
In the case of business loans, lenders check both individual and business credit score and history. Which ultimately helps them determine the borrower’s creditworthiness. If you hold a score lower than 700, the risk associated with repayment delay or default increases. Thus making lenders apprehensive of providing approval for the advance.
Some crucial factors that affect these scores include –
a. Previous repayment records
b. Total financing availed as a percentage of total income per month
c. Total credit utilisation out of the available credit
d. Credit mix availed
e. Errors or omissions in your credit history
You may thus want to reflect on these aspects before applying for your business loan. Doing so at least 6 months prior to your application allows it to reflect in your credit history in time. In case your history carries any errors or omissions. Dispute such error with relevant documents for it to be corrected appropriately. In case you hold a low score, you may still receive approval for the advance. Albeit at a higher business loan interest rate.
2. No Definite Business Plan
When assessing a loan application, lenders usually keep an eye out for confirming business stability and their definite plans for the future. A well-charted plan means the business has seen through with clarity the future scopes of the venture. Determined definite goals, and made necessary arrangements for its successful completion. A lack of such clarity in the business plan indicates towards uncharted business goals and indefinite vision for the firm. This may not fall in the good books of the lenders, thus jeopardizing your chances of loan approval.
3. Cash Flow Shortage
A decent cash flow of the business is a good indicator of the venture’s financial health. For any enterprise, large or small. Its short-term liquidity is determined based on the cash flow it has in the given cycle. It is thus also an indicator of the business’s capacity to meet short-term liabilities like the loan EMIs. Which allows the financial institution to gauge the total risk associated with lending to the venture. You must thus make sure to prepare cash flow statements updated up to the month preceding your loan application for a better peek at its cash flow.
4. Lack of Necessary/Updated Documents
To approve financing for the business, financial institutions require them to mandatorily provide a few business documents. These financial statements allow lenders to gauge the overall financial health of the venture. Based on which they determine the loan amount to approve, the tenure of repayment, interest rate to be levied. And other associated terms of the advance.
– Balance Sheet for two previous years
– Profit and Loss Statement for two previous years
– Report on accounts receivable (updated)
– Income tax return filed
– Any other pertinent document that the lender asks
When applying for a business loan, make sure to check your affordability of the advance as well. And choose an amount whose EMIs can be conveniently accommodated in the business’s monthly profits.
You can use an EMI calculator to check your loan affordability. Which also helps calculate other repayment parameters like the total loan liability and the total interest payable for a better affordability assessment. It is further advisable to use the eligibility calculator as well and apply within. The maximum loan availability as per your borrowing profile for better chances of approval.