Business Loans Mistakes to Avoid

There are several roadblocks to obtaining a low business loan interest rate. If you don’t work on those obstacles your loan application will be denied. You are probably wondering what these problems are. Read the article to learn more.

Top 5 Business Mistakes That You Must Avoid

  1. Inadequate Business Plan

The most common reason for your loan denial is not having a proper business plan. You need to prepare an informative and detailed business layout before applying with the lender. Make sure your plan consists of sales forecasts, revenue projections, expansion plans, and so on. In addition to that, you may also detail your business operating costs, expenses, and so on. 

The financial institutions will ask you the following questions when you apply for this loan.

How much money do you require?

What will you do with the money you have been given?
What approach would you use to repay the loan?

The lender will have a better understanding of your firm if you provide audited financials, such as a balance sheet, tax filing receipts, profit and loss statement, and cash flow statement. Such documents might also help you get an affordable business loan interest rate. 

  1. Not Maintaining Liquidity

Another major blunder made by businesses is failing to maintain liquidity in their operations. The term “liquidity” refers to the cash flows of a business. The majority of business owners just spend the majority of their earnings to cover their operating costs. They do it solely to save money on loans. However, once their free cash flow runs out, they would be in desperate need of business loans in India.

If you are one of these business owners, you must immediately cease making this mistake. Make sure you have enough cash on hand and in the bank to qualify for this loan. It will indicate to the lender that your company has enough reserve funds to deal with the uncertainties.

  1. Picking up the Wrong Loan:

Business loans in India are tailored to serve specific business requirements. You must assess your needs and understand the different products thoroughly to pick the right one. For example, if you own a diagnostic centre, seeking a term loan to purchase medical equipment costing Rs. 50 lakhs is a mistake. This is because term loans are available for the maximum amount of Rs. 25 lakhs. Similarly, if you need money to make a large upfront payment in your firm and you are using a line of credit, this is not the correct financing solution for your business.

Some of the common business loan products available in the market are term loans, medical equipment loans, working capital loans, lines of credit, overdraft facilities, and a few more. 

  1. Not Understanding the Factors that Influence Your Business Loan Interest Rate:

If you make this mistake, be prepared to pay a significant amount in interest payments or, in some cases, to face rejection. Many individuals believe that interest rates are determined solely by evaluating your company’s credibility. However, this is not the case. Other factors are also taken into account by financial institutions. Some of them are listed below.

Business financials are used to determine whether or not your company is financially sound.
Tax returns are used to determine the legitimacy of a company.
Lenders also check the age of your business. It helps them to check if you have established your business in the market or not. 

  1. Overborrowing:

Overborrowing is always a risky affair, be it a business loan or any other sort of financing. In the long run, the borrower is burdened with interest payments, that, if not paid on time will lead to poor credit history. To understand the impact of overborrowing, let’s take an example,

Let’s say your company needs Rs. 10 lakhs to cover its major expenses. However, due to your strong credit history, you are qualified for a maximum loan of Rs 15 lakhs. If you overborrow here, the consequences will be as follows.

Rs. 10 Lakhs Loan
Rs. 15 Lakhs Loan

Loan Tenure
3 Years
3 Years

Interest Rate

Rs. 32,739
Rs. 49,108

Interest Payable 
Rs. 1,78,594
Rs. 2,67,891

Total Payable 
Rs. 11,78,594
Rs. 17,67,891

You can see that when you overborrow, both your EMI and the amount of interest you have to pay go up. Since you exceeded your limit, you will have to pay Rs 89,297 more in interest.

To sum it up

Obtaining a business loan in India is just as important as making important business decisions. As your company expands, so does the need for finances. As a result, making the above mistakes is simply unaffordable, and if you persist in doing so, expect to pay a high business loan interest rate or risk rejection.

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