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Tata Capital > Blog > Loan for Business > Common Mistakes to Avoid When Applying for a Small Business Loan

Loan for Business

Common Mistakes to Avoid When Applying for a Small Business Loan

Common Mistakes to Avoid When Applying for a Small Business Loan

When you’re in the hopes of growing your business, you might not have enough capital to get started. A study states that close to 82% of businesses fail due to problems with cash flow. To safeguard yourself from such a consequence, you must have a good working cash flow to succeed. But, for some reason or the other, you might not have the capital to have a smooth flow of money either due to pending payments or due to your startup being new. 

This is when a small business loan can be useful. As you may know, the numerous benefits it offers, there are also a couple of things to note before taking on one. Here, we walk you through some of the common mistakes you can avoid before taking on such a responsibility. 

Not understanding your business finances

At the heart of every business are its finances. Before you even think of applying for a loan, it is  extremely vital to know how solid of a business you have. Although the experience of going through your finances can be bitter, it is essential so you don’t get caught in any schemes you weren’t aware of. Signing up and not knowing what the business loan requirements are can cost you dearly. We cover the essentials here so you can make better decisions.

1. Cash flow

Vital to any business, big or small, cash flow is the agent that drives your business forward. Knowing its concept fully can give you a better head start in your process of applying for a loan. Cash flow is simply the money that comes in and goes out of your business over a specific period. There are two types that you must be aware of:

a) Positive Cash flow

This is the ideal state to be in. A positive cash flow denotes that you’re bringing in more money than you’re spending. Most lenders see this as a positive note as it gives them the trust that you are a reliable client to do business with. Not only do your prospects of long-term loans increase but your healthy business can give you the next big break too.

b) Negative Cash flow

Negative cash flow is when your expenses are higher than your income or when your income hasn’t yet reached your account. Payments pending or expenses on new machinery, and inventory costs, can affect your short-term ability to spend money. Luckily, with a small business loan, you can be sure to meet the expenses. Once you receive money from pending payments, you can end your loan as per the schedule giving you flexibility and control. 

2. Accounting

Running day-to-day activities can be a struggle without proper accounting. Businesses of all sizes deal with accounts to ensure their business is properly running. While accounting as an umbrella term has many facets, let’s see the common ones that are important before you go for small business funding.

a) Bookkeeping

Making up the day-to-day activities of your business comprises tasks such as inputting expenses, sending invoices, monitoring paychecks, and more. This will give you an ideal representation of all the criteria for business loan requirements as they deal with the ins and outs of your finances.

b) Taxes

If there’s one department that you have to be careful with, it’s the tax department. As there are so many taxes involved from VAT to income tax and more, ensuring to get them properly can help in your prospects of getting long-term loans.

Neglecting to plan for loan repayment

Once you have the funds from your small business loan, you must make sure that your repayment plans are well underway. As we covered the important factors which make up your business already, using them to see how you can repay your loans becomes easier. Let’s now take a closer look at how you can plan on repaying your long-term loans.

1. Assess your expenses

It’s time to visit the balance sheet once again. Now that you’ve got a business loan in your hands, using it properly is also essential. Check how much your expenses are on a daily, weekly, or monthly basis to see whether the expenses are regular or if any unprecedented bills add up. Knowing how much your loans are helping and how you put your expenses accordingly can help you repay your loans without any defaulting.

2. Part Payments

A popular method of paying loans is through EMI where you end up paying a small portion of your income towards it. While this is convenient, another easy way to finish your loan is through part payments. When your business does well and you have money to spare, part payments help a lot to finish off your debt. This can especially be useful for long-term loans when it takes a long time for you to end your term. Furthermore, this careful planning also ensures that your repayment goes smoothly. 

Not spending time to get the best loan

When desperate times call for desperate measures, you might be tempted to go for the first available choice. But, when you don’t take into account important measures before securing your small business funding, you put yourself at risk. Here, we tell you what to look into before applying for a loan.

1. Credit score

Your credit score determines a lot about your potential to get the best loans. A higher credit score means you get lower interest rates for your business. Ensure you pay all of your loans on time and you’ll get a good credit score.

2. Having a solid business plan

No matter what your capital is and the kind of loan you get, without a solid business plan, it wouldn’t be fruitful. Before applying for a loan, it is best to ensure that you’ve worked out all the details of your business. Double checking to see if the finances will play out well or if the loan would be sufficient are all good factors to think about.

Not being prepared for the loan application process

Although you might be confident of meeting business loan requirements, it is still prudent to be prepared for a loan application process in detail. Knowing how even the slightest of changes can lead to your application being rejected, it is best to be prepared for a rainy day.

1. Educate yourself on loans

Small business loan policies may keep changing. This means you have to stay on top of factors like interest rates, minimum requirements, eligibility, and so on. Preparing yourself for such an event can likely get you closer to the capital you need.

2. Organise your resources

Similar to a college application, your loan application must also be completely organised. Make sure that you have all the latest documents from tax filings, revenues, expenses, and so on for the particular lender. Keeping everything prepared will not lead to any last-minute changes that may lower your chances of availing of a loan.

Be smart with your next loan

Managing a business is never easy. With so many different happenings every day, it’s hard to keep track of finances. With Tata Capital, you can rest assured knowing you have a reliable lender to provide the small business loan that’ll take your business to such great heights. 

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