Beware of Top 10 Business Loan Mistakes Committed by Young Entrepreneurs

If you have your eyes set on taking your business to the next level, there could be no better time than the New Year 2020. With the Indian economy showing signs of revival and the industrial growth looking upwards, it is time to put your business plan into action. Do not let the shortage of funds stop you from realising the true potential of your Start-Up. With the ready availability of Business Loans from various lenders, you can now easily give shape to your entrepreneurial ambitions.

Business Loan Mistakes to Avoid

Like every other type of loan, availing a Business Loan is a decision that requires due caution. Call it sheer haste or improper planning; many young entrepreneurs make Business Loan mistakes that prove to be extremely costly for them. Thus, whether you are planning to apply for a government-aided Mudra Loan or a Business Loan from a private lender, here are the top 10 borrowing mistakes you must avoid at all costs.

1. Not checking your Credit Score:

Before applying for a Business Loan, you must always check your Credit Score. Along with the individual Credit Score of partners/ directors, the Credit Score of the business must also be paid proper attention to. Your individual score and your business’ Credit Score must be above 750 to get the best deal on loan. Some lenders may also accept a Credit Score of up to 700 if you can provide collateral or other supporting financials. If your credit rating is below the desired threshold, you must first work towards improving it and only then apply for credit.

2. No business plan in place:

You must always have a proper Business Plan in place before you apply for a Business Loan. In the event of having no clarity regarding the usage of the money, it is unlikely for a lender to approve your application. You must, therefore, prepare a comprehensive Business Plan with the help of professionals to help the lenders understand your motive behind borrowing the money and how it will help your business grow.

3. Borrowing more than what you require:

This is a classic mistake that young entrepreneurs make and end up increasing the burden on the business financials. Do not fall into the trap of maximum Eligibility for a Business Loan, instead borrow only as much money as you require. Remember that a bank loan comes along significant interest liabilities. There is no point in paying EMIs for the amount which is lying idle in your bank account.

4. Applying with multiple lenders simultaneously:

Whether due to desperation or due to lack of knowledge, many entrepreneurs end up submitting their Business Loan applications with multiple lenders. This not only results in the lowering of the Credit Score but also in multiple payments of processing charges, you should not commit this mistake and should do your research before applying. This will help you save some time and money and thereby improve your chances of getting the Business Loan approved.

5. Not negotiating on interest rates:

Business Loans are a significant financial responsibility with a repayment tenor that can go up to seven years, which results in a substantial interest cost. Young entrepreneurs often make the mistake of not negotiating on the interest rate. You must not commit this mistake and always try to get the best deal from the lender. For instance, if you are applying for a Mudra Loan, always try to negotiate for the best Mudra Loan Interest Rate and save maximum possible on the interest cost.

6. Opting for the longest repayment tenor:

Many borrowers opt for the longest repayment tenor just because it is available. Ideally, you must opt for a repayment tenor that gives you an EMI which you can easily afford and allows you to repay the loan as quickly as possible. There is no point in having spare funds in your account when you have outstanding loans.

7. Not having updated financial documents:

To ascertain the eligibility for a Business Loan, lenders require updated financial documents. But most entrepreneurs forget to update their financial documents, which leads to a lot of delays. You should, therefore, keep your financial documents like Income Tax Returns, Audited financials, Net worth Statements, and GST returns updated and certified by Chartered Accountant.

8. Applying for the wrong type of loan:

Another classic mistake that entrepreneurs make is applying for the wrong type of loan. Business Loans come in various forms, such as machinery loan, working capital loan, C Limit, OD Limit, etc. Each type of loan has its utility and benefits. By opting for a wrong type of loan, you will lose out on several of the available benefits. So, always be careful to apply for the right type of loan as the situation demands.

9. Not reading the terms and conditions properly:

Owing to the urgency of funds, many young entrepreneurs sign along the dotted lines without going through the terms and conditions of the agreement. This is a very serious mistake which might cost you dearly. So, never rush into signing the loan agreement, and read every point carefully. If there are any doubts, feel free to ask the lender for the necessary clarifications.

10. Changing the structure of the business:

Lenders want businesses to have stable management and structure before lending them the money. If your business undergoes major structural change or you change the line of business, the lenders will be sceptical about offering a Business Loan. So, you must avoid incorporating any major structural changes in your business before applying for a Business Loan to improve your eligibility.

These are some of the common mistakes made by young business loan applicants. By avoiding these errors, you can significantly enhance your eligibility for a Business Loan and can realise your long-standing entrepreneurial ambitions of yours.