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10 Common Mistakes to Avoid When Applying for a Business Loan in UK

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Scaling any business will be difficult without loans. It is only likely to hinder your company’s growth and expansion. NBFCs and commercial banks offer business loan of all types and sizes. Following the proper application process will enable you to get a hold of your desired loan. However, be prepared to show your business history to potential lenders. Avoiding some commonly committed loan mistakes can help you derive the loan quickly and without facing hassles.

10 common Business Loan mistakes to avoid

1. Inadequate business plan:

Not having an organized business plan or business ideas might mean not getting loan approvals from financial institutions. Generally, the lender expects the borrower to have a comprehensive business plan to check its viability. It should include basic information like earnings, operating costs, profit, future business potentiality, and earnings.

2. Loan Repayment history and past defaults:

Entrepreneurs often underestimate prior missed payments. Past overdue is one such consideration. Lenders use your business-related past loan records to calculate your risk profile. Track company invoices, credit card bills, and accounts receivable. Ensure a regular repayment schedule as it helps enhance loan approval chances.

3. Inadequate credit rating:

Different lenders use different criteria to grant loans to businesses. While processing loan applications, lending institutions take into consideration your credit score. Excellent credit rating helps negotiate better interest rates. Maintain a decent CIBIL score and strong credit history before making any loan application.

Inadequate credit rating

4. Borrowing beyond capacity:

Understand fully your present business and Personal Finances. Identify the EMI amount to pay and accordingly know your payment affordability. Borrow an amount that you will be able to pay back on time and without fail.

5. Insufficient liquidity:

Lenders will have a good look at your business liquidity ratio. It means having money in the bank and on hand. Those with financial reserves can qualify easily for commercial loans.

6. Skipping fine print:

Another mistake committed is not heeding paperwork-related comments. Conduct a comprehensive audit of loan documents on loan approval. Understand thoroughly the legally binding documents before you sign them. Seek expert assistance wherever you fail to understand difficult financial terms. Besides having a good Business History, ensure reading the loan agreements thoroughly for hidden terms and charges. It can help avoid later unwanted consequences.

7. Incorrect loan option application:

Applicants might check out different loan products and in the process apply to all of them. Research thoroughly before loan closure. Identify if you compare other loan deals and loans. Most loan applicants mistakes in identifying a variety of loan packages offered by multiple lenders.

8. Contracting with Collateral:

Contracting with collateral

Often lenders require applicants to provide collateral to approve commercial loans. It also includes vehicle loans, letters of credit, personal guarantees, secured term loans, inventory financing, asset-backed loans, bill discounting, equipment loans, etc. Lenders expect borrowers to make timely Loan Repayment and an assurance of their money being secure. Hence, borrowers should have collateral like inventory, warehouse, real estate, commercial vehicles, stocks, equipment, raw materials, retail, etc. The loan application can be denied for lack of collateral.

9. Multiple loan applications:

Borrowers making multiple credit card or loan applications are generally seen as those who are desperate to get it. Lenders also view them as people who might not be able to repay the borrowed amount. No lender will like to lose their money to those seeking multiple loans.

10. Poor or defaulted financial history:

Lenders might even see the borrower’s Personal Finances besides past business repayment history. Poor or defaulted credit will only mean your application getting rejected by most financial institutions. MFIs and NBFCs offer loan products, however, at higher interest rates since the risk component for such company types is higher.

Thus, avoiding the above common mistakes can help you to derive Business loans at lower interest rates.

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