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What are the common mistakes committed while taking a business loan?

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Baskar Sundaram

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Taking a loan is one of the quickest ways to propel your business forward. But make sure that you look into a few things before applying for a loan.  

Given below are eight common mistakes that entrepreneurs must avoid when taking a loan: 

1. Not looking into the credit score 

One of the important factors that determine the approval of your loan is your credit score. Knowing your credit rating will show your where you stand. Get your credit score from several credit bureaus. 

2. Not having a business plan 

A concrete business plan is important to show the lender your future business goals. Specifically how you plan on achieving these goals. A plan helps convince the lender to invest in your business. A well written business plan will have information about past performance, competitive advantages and proposed project. When starting a new business, a detailed plan will determine the approval of the loan.  

3. Not providing adequate collateral 

Providing collateral is important should there be a default in payment. Collateral acts as the lender’s insurance policy. Use your property and assets as collateral and it will increase your chances of getting a loan. 

4. Not explaining what the loan is for 

When applying for a loan make sure that you explain what exactly the money will be used for. Lender will need to know how the money will be put to use and how it fulfils your wants and needs. 

5. Not prepared with financial documents 

You should always apply for a loan with the proper financial documentation. Apart from your credit score lenders look into your cash flow statement, six months of bank statements, tax returns, the most recent balance sheet and profit & loss statements. Therefore, always maintain a record of your financial statements and documents. Make sure it is up-to-date.  

6. Only focusing on the interest rate 

Interest rates keep fluctuating. Make sure you lock in on a rate you are comfortable with instead of waiting for the rate to change. Focus on other aspects of the loan like the term, lender’s flexibility on repayment and the amount needed for collateral.  

7. Not reading the contract 

Do not hastily sign any contract. Before you put your sign over the dotted lines make sure you fully understand the terms and conditions of the transaction. Once you sign there is not going back. Therefore, clarify any queries and do not assume anything. 

8. Depending on one lender 

Being fully dependent on one financial institution can make your business vulnerable. Instead focus on meeting other lenders and consider other financing options before you make a decision.  

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