Five Common Pitfalls to Avoid When Applying for Business Loan Online

Small businesses regularly need a business loan to meet their urgent working capital needs as well as to fuel business growth. However, such is the sorry state of affairs in India that only 4% of the estimated 58 million SME units have access to formal channels of capital finance. One of the main reasons for this is that small businesses in India have traditionally been run as family businesses. Most of these units have neither the required collateral nor the requisite financial documents to strengthen their case for a business loan from traditional financial institutions such as banks and other non-banking finance companies (NBFC).

The lack of access to capital finance encourages SMEs to approach the unorganised lending channel, mainly moneylenders. Such lenders charge exorbitant rates of interest and their business operations are very unprofessional. Further, they do not offer any flexibility in business loan repayment.

As SMEs contribute to 40% of Indian exports, their growth rate is vital to the development of the Indian economy. The government has been taking several steps to ensure an increase in capital finance for the SME sector by banks and NBFCs. However, the scenario remained static until the entry of technology-enabled FinTech companies. Such lenders use the best technology engines based on Big Data and analytics to calculate the business loan requirements of a small business. The loan application process is completely online and one can apply for a loan for business through their websites or through mobile app anytime and from anywhere. The loan processing is much faster as compared to traditional finance institutions and, once approved, the business loan is credited to the bank account of the business in three working days.

Applying for a loan for business online saves you from the hassles of standing in long queues in banks with piles of documents, awaiting your turn. However, to ensure a quick and favourable disposal of your business loan application, there are certain conditions that you must adhere to, and at the same time common pitfalls that you must avoid. We list the most important ones here:

  1. Inadequate documentation: Whenever you apply for capital finance, the first thing a lender would want to be satisfied with is your financial standing and your ability to repay the business loan as per schedule. Therefore, as a business owner, you must always maintain a proper record of your financial statements, such as the history of previous loans, tax statements, bank statements, identity proofs and business receivables in past and future. A capital finance application supported with proper documentation that clearly conveys the purpose of applying for a business loan is likely to be approved the fastest. In addition, keeping such documents in order highlights the seriousness with which you pursue your business dealings and thus enhances your reputation in the eyes of the lender.
  2. Deficient credit profile: The credit profile of a business is a key parameter checked by lenders before sanctioning a loan for business. A good credit score depends on your history of having repaid previous loans on time, payments of bills and making timely payments for current loans. All this provides a healthy picture of the state of your business and convinces a lender about its future prospects. A business should always remain mindful of its credit rating and keep a regular eye on it. A healthy credit profile ensures you never face a problem while applying for a business loan in future, and therefore can focus on business growth without worrying about capital finance.
  3. Undefined business objectives: Before applying for a business loan, you must be convinced and clear about the purpose for which you need capital finance. For instance, do you need it to procure new machinery, or perhaps to expand an existing line of business, or to make payments to your suppliers while you await payments from your customers? You should also ensure that the business loan taken should only be used for the purpose for which it was applied for and not be diverted elsewhere. Such discipline shall ensure you never fall into a debt trap that would render you unable to repay your loan instalments on time.
  4. Failing to choose the right business loan product: You must not blindly apply for a loan for business by simply going after a lender’s past credentials. Instead, you must make a diligent research on the kinds of business loans available to SMEs. Term finance is an excellent loan product that proves quite helpful in meeting urgent capital finance needs. It is offered at competitive interest rates and there is ample flexibility provided in repaying loan instalments.
    There are loan products that are meant to address the requirements of specific businesses. Supply chain finance is good for those who have business receivables from blue chip companies. Such invoices can be used to access business loans at competitive rates relatively quickly. Online seller finance is another product that works well for merchants who sell through e-commerce marketplaces. Based on their transaction history, business loans are offered at competitive rates to help meet seasonal spikes and to procure resources for business growth.
    Similarly, merchant cash advance helps those retailers who receive a major chunk of their payments through PoS terminals. Such merchants can receive a lump sum payment upfront to meet their urgent business need while repaying the loan through monthly deductions in card receivables.
  5. Paying little attention to interest rates and flexibility in repayment: You should compare the offerings from traditional lending institutions such as banks with new age FinTech lenders that use the best of technology to provide business loans at the most competitive rates. Such lenders thoroughly understand the needs of small businesses and use the most advanced algorithms to determine the future business prospects of the applicants. They also take into consideration the cyclic nature of small businesses while processing their loan application. Further, they offer the maximum flexibility in repayment of a loan should you face challenges in meeting your business loan repayment schedule.

By avoiding these pitfalls while applying for a business loan application online, you not only ensure the best deal for your business but also ascertain that you have adequate capital finance on hand whenever your business needs it.

Leave a Reply