When you run a small or medium-sized business in India, you understand how important financial resources can be for the growth of your company. It is also possible that you might require financial assistance to maintain or grow your business. In such situations, personal loans can be the most accessible and flexible financial option available. However, applying for a personal loan can be a tricky process, involves a lot of detailed paperwork, and making mistakes can cost you more than loan rejection.
In this comprehensive guide, let us discuss the common mistakes to avoid when applying for a personal loan for your SME and provide insights into how you can successfully secure the required funds for your business without any unnecessary headaches or complications.
#1: Failing to Assess Financial Needs Properly
Before applying for any loan, it is very important to take a step back and assess exactly how much money your business needs. It may sound very obvious, but many a time, business owners rush into the process without thoroughly evaluating their financial needs.
If you fail to assess your financial needs and do not borrow enough, your business might not have the funds it needs to cover the expenses, forcing you to seek additional financial help later. On the other hand, borrowing more than you need can saddle your business with unnecessary debt and financial pressure.
To avoid the mistake, sit down and analyze your current financial situation and your future financial needs. Make sure you account for the ongoing business expenses too. You should always connect the loan amount to clear business goals, be it for purchasing equipment, expanding business, or managing daily operations. Knowing how much you need and for what purpose will not only help your business grow but will also keep you out of unnecessary debt traps.
#2: Ignoring Credit Score
Your credit score tells a lot about you, your financial habits, and your financial situation to the lender. During the approval, your credit score plays a significant role in determining whether or not you will get approved for a personal loan. And even though your business is going well, lenders often use your credit score to gauge your reliability and financial responsibilities as a borrower.
Ensuring your credit score is at its best before applying for a loan increases your chances of loan approval or receiving a loan with better terms or a lower interest rate. However, don’t wait until you need a loan. Always keep an eye on your credit score so that you can address any issues that might hurt your loan application. And if your credit score is low, take the necessary steps to improve it.
#3: Not Comparing Loan Offers
One of the most common mistakes that SME owners make when applying for a personal loan is not comparing loans and failing to conduct thorough research to compare the various loan offers. Each lender will have its own set of policies, terms, and interest rates, as well as fees and repayment plans, and choosing the first lender you come across could result in paying more than you should. By conducting extensive research and evaluating lenders, you can make informed decisions that are in line with your financial capabilities and long-term objectives.
#4: Overlooking the Total Cost of the Loan
Many SME owners focus solely on interest rates when applying for a personal loan. While the interest rate is important, it doesn’t give you the whole picture of the loan cost. The interest rate is only a portion of the overall cost. Fees, charges, penalties, and other repayment terms all have an impact on how much the loan will cost you and your business in the long run.
Always look beyond the interest rate and consider all aspects of the loan. Many loans come with charges like processing fees, preclosure charges, late fees, cheque bounce charges, or other costs that can make the loan more expensive than it seems. Comparing these factors across lenders can help you save money.
A common myth about loan repayment that centres on a longer tenure and lower EMI can also have a big impact on the overall cost of your loan. A loan with a low monthly payment may seem attractive, but if the repayment period is extended, you could end up paying significantly more in interest over time.
Thus, before applying for a loan, consider all of the fees, penalties, and repayment terms. Choose the most cost-effective option that allows you to pay without feeling overburdened.
#5: Inadequate Documentation Preparation
Complete and accurate documentation is very essential when applying for a personal loan for your business. Lenders will require proof of your financial situation. Failing to provide all the required documents or submitting inaccurate information can slow down your application or result in denial.
Before applying for a loan, make sure you have all of the necessary documents, including KYC documents, bank statements, tax returns, residential proofs, and any other documents required by the lender. Before submitting your application, make sure to double-check all the documents to ensure they are complete and accurate. Even small errors can cause problems.
#6: Failing to Have a Clear Repayment Plan
A loan is not just about getting some funds. It’s also about being able to pay it back without hurting your business or personal financial health. Without a clear repayment plan, you risk straining your cash flow and putting your business and personal financial health in a difficult place.
You may have secured a loan with a lower interest rate or better terms, but if you do not have plans for how the repayment will be done or if your revenue projection does not meet expectations, you could end up struggling to meet your obligations.
To avoid unnecessary burdens, make sure you have a clear repayment strategy in place that corresponds to your cash flow. Consider various scenarios, such as lower-than-expected revenue, and have a backup plan ready if necessary.
#7: Neglecting or Misunderstanding Loan Terms and Conditions
Sure, a loan agreement can be complex and filled with complex technical jargon. However, neglecting to thoroughly review your loan agreement or failing to understand the terms and conditions of your loan can lead you to costly mistakes down the lane. Important information, such as loan interest rates, penalties, repayment schedules, and so on, can have a significant impact on your personal and business finances. As a result, carefully reading the loan agreement is critical to avoiding such major pitfalls.
Never sign a loan agreement unless you fully understand everything in it, including repayment terms, fees, charges, interest rate clauses, and so on. Take time to read the loan agreement, and if you come across any terms that are unclear or unfavourable, do not be afraid to ask questions to your lender.
#8: Falsifying Financial Information
When applying for a loan, faking your financial information is a grave mistake with serious consequences. Lenders conduct extensive research on applicants and can easily detect discrepancies if the applicant attempts to falsify any critical information. If caught, it can result in an immediate rejection of your loan application and damage to your market reputation.
Ensure that all of the information in your loan application is correct and up-to-date. To avoid discrepancies, double-check your financial statements, business tax returns, and personal information. Honesty and transparency in your loan application can increase your chances of approval.
#9: Applying With Multiple Lenders
Although applying for a loan with multiple lenders might seem like an opportunity to increase your loan approval chances, doing so can negatively impact your credit score. Each loan application triggers a hard inquiry on your credit report, lowering your credit score by 3-5 points. This may not seem like a big deal, but having multiple inquiries in a short period can significantly lower your credit score and signal financial distress to lenders.
Hence, it is always better to research carefully before rushing for a loan application. Learn about the eligibility requirements, loan terms, and other relevant information before applying with a lender that best suits your profile and business needs.
#10: Overlooking Expert Advice
Seeking advice from a financial expert can make a significant difference in your loan application process. Working with an experienced financial advisor can help you navigate the complexities of personal loan applications and avoid costly mistakes. It also increases the likelihood of obtaining a loan that meets your needs. This can comfort and direct your financial choices.
With a team of experienced professionals and strong collaboration with leading NBFCs, Kreditbazar offers the financial expertise you need to make sound decisions. We assist enthusiastic business owners like you in navigating the complexities of a personal loan and processing it efficiently. By working closely with you, we ensure to provide you with excellent financial advice and services to help you obtain a loan from one of our partnered NBFCs that matches your profile, increasing the likelihood of loan approval.
Conclusion
Securing a personal loan can be a significant milestone for your business. However, applying for a personal loan for your SME requires careful consideration and planning. Avoiding common errors in personal loan applications like failing to assess your company’s financial needs, ignoring your credit score, and failing to compare loan offers from multiple lenders can greatly improve your chances of approval. Remember, the goal is not just securing a loan but ensuring that it aligns with your business’s financial health and repayment capacity. By carefully planning your loan application, you can avoid unnecessary stress and set your business up for sustainable growth.
If you’re looking for personalized advice and expert guidance, Kreditbazar is here to assist you. With the streamlined online portal, enriching collaboration with industry-leading NBFCs, and seasoned in-house experts, Kreditbazar makes it much easier for you to process your loan with multiple NBFCs without worrying about your credit score being jeopardized. Whether you need capital for expansion, working capital, or equipment purchases, our team of experienced financial consultants can help you find the right loan from our partnered NBFCs to meet your business needs.
