Are you opting for a business loan but still unaware of the hurdles and setbacks on the way? Do not take a wrong step and get into the soup. Do not feel perplexed about the procedures. Stay alert and be aware of the hurdles in your business loan process.
Here are the Possible Hurdles to Overcome During your Business Loan Process:
Deciding the Loan Amount-
Knowing the amount you will ask for from the financial institution to process is necessary. Many small business owners or entrepreneurs fail to judge the business loan amount properly, which leads to numerous problems later. You must know your debt service ratio to ask for the appropriate business loan amount. Even the financial institutions that will lend you the money will evaluate your demand based on this debt service ratio. Follow this formula to find out yours now before asking for the loan.
Debt Service Ratio = Monthly Free Cash Flow / Monthly Loan Payment
Chalking Out a Proper Business Plan- Before applying for a business loan, you must prepare a proper business plan with financial projections. The financial institution will approve or disapprove your loan application based on the plan. Planning is critical if you are starting a new business. As there are no three-year track records for new companies, there is a high chance of the loan application getting rejected if the business plan is not submitted correctly.
Credit Score
Small business owners must sign a personal guarantee contract before taking money from any lender or financial institution. As per this agreement, the person applying for the loan will be personally liable to repay the loan amount if the business fails to pay the loan. In such cases, the personal credit score is of immense significance because that is what the lender relies upon while deciding on your business loan approval. Your credit score must be 700 or higher. If it is not, you need to improve your credit score before applying for the loan.
Arranging the Collateral for the Business Loan
Another thing that financial institutions feel is essential while approving a business loan is your collateral. If your debt-to-service ratio and personal credit score are excellent, you must have some collateral before submitting your business loan application. When you know you do not possess the right collateral, it is best to go for the Small Business Administration Loan.
Keeping Equity in Mind
Down payment is mandatory for any loan. No matter how brilliant the business plan or proposal is, the owner needs to be ready to make the down payment to get the business loan sanctioned. The down payment along with three months of account statement must be submitted to the financial institutions before the loan gets approved.
Preparation of the Correct Documentation
There is a checklist for all the documents necessary to apply for a business loan. Even if all the above points have been covered, the financial institution can still reject the business loan if the submitted documents are incorrect or missing. Despite the size or image of the business, proper documentation is necessary to avoid any trouble while applying for a business loan.
Choosing the Right Lender or Financial Institution
It is most important to select the lender or the financial institution from which the loan can be taken. Different lenders and financial institutions offer different types of Business Loan Interest Rates to choose from. It would be best to choose the right lender for your business loan beforehand.
Opting for the Correct Interest Rates
As it will be known to most of you, interest rates are not the same everywhere. Your business or company’s profit and loss statement must be kept in mind while selecting the interest rate. If your business is not fetching enough profits, how will you repay the debt and the interests? So, be wise and settle for an interest rate that you will be able to repay comfortably.
Settling of the Already Existing Debts
There are businesses that take different types of loans from various financial institutions. Such businesses can be in trouble when applying for another business loan while the earlier ones exist. The only way to resolve this issue is to lower the debt utilisation rate and first repay the outstanding balances. Then only the business can go for another business loan.
Selecting the Correct Industry
Some businesses are related to risky industries, so the chances of loss are higher. Financial institutions often reject business loans of such enterprises. So, you should be aware of such aspects and apply with utmost care. If you are a starter, you need to be careful about choosing the industry if you plan to apply for a business loan in the near future.
If you are an entrepreneur or a professional looking for a business loan on a competitive interest rate with quick approval facility, that too online, you can reach out to new-age financial institutions like Clix Capital. Their business loan approval process is easy, hassle-free, and quick.
