Business loans can help fulfill many financial requirements, from purchasing tools or hiring professional staff to renting or buying operational spaces. Moreover, women empowerment schemes, startup schemes, and others are now available as well. These provide aspiring entrepreneurs with the financial backing they need.
However, there are some challenges that you may face while applying for these financial solutions. These can lead to rejected applications, which restricts your access to funding and thereby, affects your venture.
Given this, knowing about these challenges in advance is crucial as it can help you prepare and boost your application. Read on to learn about some common challenges and tips to overcome them.
Multiple Existing Business Loans
If you have multiple existing business loans, it may imply financial instability and a possibility of default. Both of these increase the risk for the lender, and, as such, they may reject your application. Moreover, if the lender approves your application, there is a chance that the terms will be stringent.
This includes high-interest rates, restrictions in tenure, or lower sanction amounts. All of it can hinder your borrowing and repayment experience. Therefore, when applying for a loan, you should consider closing some existing loans. This will increase your borrowing capacity, enabling you to get financing on favorable terms.
Difficulty in Meeting Collateral Requirements
There may be collateral requirements depending on the lender and the loan you choose. Collateral acts as security and reduces the lender’s risk. This is because they can auction your asset to recover the loan amount, in case of default.
Generally, lenders accept property documents or machinery used in the business or other assets as security. Given this, furnishing the required collateral can become challenging for small- or medium-sized ventures and service-based businesses.
Lenders can reject the application since a lack of collateral would make you ineligible for the loan. To avoid this, you should only apply for a business loan for startups or other ventures after checking the requirements.
Inconsistencies in the Cash Flow
Lenders ask for financial documents to check the cash flow and assess if it’s consistent. This is because it indicates profitability and that you can make timely EMI payments. With insufficient cash flow, financial institutions may hold the approval unless you assure them of repayment.
This can include offering a guarantee, collateral, or other options accepted by the lender. However, doing that may not be feasible or possible in some cases. Therefore, it is essential to maintain a sufficient cash flow and check for errors in cash flow statements to solidify your application.
Short History of Operation
When you submit a loan application, lenders review the business performance and the period of its operations. This is because it can help them gauge their repayment ability.
This can be challenging for MSMEs and new startups as they may not have the ideal business vintage. However, some lenders offer a business loan for startups or other establishments with a short operational history. Applying for these solutions can help you get the financial resources you need.
Poor Performance of the Sector
Your business sector and its performance are also essential aspects that lenders look at due to an increasingly competitive market. Moreover, the performance of your business, to a certain extent, depends on the sector’s performance. As such, it reflects your repayment ability.
Given this, some seasonal sectors may have a disadvantage and difficulty getting credit. To counter this, you must conduct thorough research and create counterarguments to showcase your repayment capacity.
Low Credit Score
Your credit score represents your creditworthiness and the risk your profile carries. A low score reduces your creditworthiness and increases the risk, which makes lenders hesitant to approve the loan.
Some lenders even require a minimum credit score to qualify for the loan. You should check your credit score before applying for a loan. If you see a low score, take steps to improve it and apply with a lender that accepts the score.
Lack of a Solid Business Plan
A business plan consists of details on how you plan to use the loan amount and your strategy to grow your business. As such, having a weak business plan will hurt your application. To side-step this challenge, conduct market research to show growth projections and future opportunities using the loan amount when preparing your business plan.
Tips to Increase Approval Chances of Your Business Loan Application
In addition to the above tips, there are a few other ways to boost your application and get the necessary financial resources.
Research Different Lenders and Loans
Today, numerous lenders offer various types of loans to meet the requirements of different ventures. As such, the easiest and best way to increase your chances is to apply for a loan meant for you.
For example, as a new venture, you may have a higher chance of getting approval for a business loan for a startup than for a regular business loan. So, do your research before applying. Doing this will also help you compare different offers and choose the most feasible one.
Consider Applying for Customised Schemes
Like loans, the government offers many schemes that cater to different groups of entrepreneurs. For example, there are numerous women empowerment schemes to support females leading small businesses.
Since they are meant to meet the requirements of a certain category of borrowers, these schemes generally have lenient criteria. These are unlike the stringent ones set for other loan options. Moreover, these tailored loans often have lower borrowing costs, enabling you to get funding affordably.
Apply With a Known Financial Institution
Getting a business loan for startups or other ventures is easier when you apply with a lender that you have some amount of experience with in the past. This is because the lender is already familiar with your business and knows your repayment ability.
As such, they may be less hesitant to approve the offer. You can also try securing a pre-approved offer, as lenders make these available only if you qualify.
With these tips, you can apply smartly and get the financing you need. Remember to assess your needs and eligibility before applying to ensure you are not short-funded. You should also ensure timely repayments to boost your creditworthiness and get future loans easily.
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