Top 5 Mistakes to Avoid When Applying for a Business Loan – Forbes Advisor INDIA

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As the crisis following the Covid-19 pandemic that swept the world slowly fades away, 2022 shows all signs of being the year of recovery. The economic contraction is giving way to a resumption of growth for businesses at all levels. If you are running a micro or small business in India, recovery will be heavily dependent on securing new customers quickly and stabilizing your cash flow to ensure your revenue is back to pre-pandemic levels. This way you can keep your operations running smoothly while investing in growth.

One way to quickly rebuild your business is to apply for a business loan, which would give you the capital you need up front to buy stock for your business, or hire additional help, or purchase necessary equipment. The caveat is that obtaining a loan and using it properly can be a challenge if you are new to the process of obtaining a business loan. Unlike a personal loan, which you can divert to children’s school fees or home appliances, a business loan has different requirements and should be used only for business purposes.

Here are five common pitfalls you should watch out for when applying for a Medium, Small and Microenterprise (MSME) business loan in India, to maximize your chances of getting approved:

1. Do not register your business

Many MSMEs in India, especially in the microenterprise category, find formalization difficult. The biggest benefit you can get by signing up is access to resources. Official registration of your business allows you to access credit from banks, government programs or private lending institutions. It serves to establish your corporate identity and type of business, and you can also access various other advantages in terms of taxation, logistics and credit facilities if your registration is complete, including documents such as a business license, a business PAN, TPS, udyam number, etc.

Most lenders require proof of business registration to be provided when submitting the loan application. Failure to properly register your business can mean outright rejection at the eligibility verification stage, even if you maintain profitability and positive sales in your business.

Depending on the type of your business, you may need to obtain a special license such as a pollution NOC, a forestry department certificate, or an FSSAI license.

For example, if you are an MSME, you need to log into the government portal for compulsory registration of udyam number, which is a free self-declaration-based platform that allows MSME owners to obtain a certificate. registration and unique identification. number for their business.

Pro tip: don’t go to an agent. You now handle most of the registration processes directly, be sure to visit verified government portals.

2. Make several loan requests

It is understandable that you would consider approaching multiple lenders for a loan, especially if you are in dire need of a loan, as there is always the possibility that one or more of them will reject your application. While finding out about a loan from various lenders might not seem like a problem, in reality it can set you back considerably.

Whenever you apply for a loan, the lender checks your credit history and your score with a nationally recognized credit bureau, such as CIBIL. This process is known as a hard investigation. Each inquiry is recorded by the credit bureaus as an attempt to obtain a loan, and multiple inquiries may make you consider it a sign of high credit risk, as this could be interpreted as difficulty in dealing with your expenses. This, in turn, can adversely affect your credit score, which will affect your chances of getting a loan.

Pro tip: You can do your research first to understand which lenders are right for you. First, you can find out more about the lender and the product by visiting their website or calling customer service for details on the requirements and the types of loans they offer.

3. Don’t research your lender thoroughly

Taking out a loan is an important decision that greatly affects your financial life for an extended period. While loans are largely well regulated, there are even fewer scrupulous lenders who use predatory practices for profit. So, the best way to protect yourself and your finances is to research the lender you are considering before approaching them for a loan.

More and more, Getting a loan is becoming a faster and easier process, as technological advancements such as digital payments and data-driven processes make applications and decisions much faster and more efficient. But it also means dubious lenders fall more easily through the cracks. For example, the rise of instant loan applications in India in recent years has seen many borrowers be duped with incorrect interest information and fall victim to the coercive collection practices of unregulated lenders.

Keep in mind that a reputable lender will make the entire borrowing process transparent and take the time to explain the process to you, disclose all aspects of the loan penalty fee up-front, and offer options to legitimate refunds.

Pro tip: Go for organizations registered with the Reserve Bank of India, as they will be strictly compliant with consumer safety.

4. Not understanding the loan product

Loan products can seem complex because they are often presented with a lot of information and jargon that is difficult to interpret. It is absolutely essential for you, as a borrower, to understand what loan product you are purchasing before accepting the loan. Understand how the loan product can be used, Equal Monthly Payment (EMI) requirements, prepayment options, and other terms and conditions. Contact the lender for clarification before signing the loan. You can take some time after approval to make your final decision.

It is important to have an idea of ​​why you need the loan amount and how it will be allocated once issued. You should check with the lender if you will get the amount upfront or if it will be staggered. Lenders sometimes perform usage audits to ensure that the loan amount is not misappropriated and used for the proper reasons, which were cited in the application.

Pro tip: Before applying for a loan, get a good idea of ​​your needs so that you can apply for the correct loan amount. You can also use an EMI calculator to figure out how much you’ll need to pay each month and make sure your cash flow supports the repayment.

5. Withholding of information from the lender

As important to you as it is to know your lender well, they must also do their due diligence to understand you as a borrower. They are likely to collect income documents, tax returns, GST returns, and bank statements to assess your creditworthiness. While withholding information or changing numbers about your past assets and expenses or borrowing might seem like an easy way to make sure you get a loan, it’s a major mistake you should definitely avoid.

Anything but full disclosure of your or your business’ income and expenses can amount to fraud. Not only will this result in your loan being rejected if the lender realizes the discrepancy, it could also rule out the possibility of contacting the same lender again. In extreme cases, it can even lead to serious legal consequences for you. While this goes unnoticed, keep in mind that the reason lenders look for this information is to make sure that you get a loan that you are able to repay. Fooling the numbers would mean ending up with a loan that your finances can’t pay off, putting you in hot water.

Pro Tip: Provide full disclosure of your finances as they are today, this won’t necessarily deter a lender, but hiding details is likely to do so and could make it difficult to obtain a loan. commercial loan.

Final result

It is crucial to know the possibilities and caveats involved in the process before you start to apply for a loan. A loan that is properly used can make your business growth much smoother. Once you understand the type of loan you are looking for and the lender to contact, you can avoid these pitfalls by having your documentation handy and providing full disclosure of your financial details.


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