Do's and Don'ts of Business Loan

Do’s and Don’ts of Business Loan

Starting a business is always challenging; you must manage, coordinate, and consider many things simultaneously. Financing your business must be the top priority. A business loan can be a great potential source of capital for a small business, as banks and other financial institutions are more inclined to approve small business loans now than ever. However, applying for a business loan can be challenging for many entrepreneurs as they struggle to understand its nitty-gritty. But keeping just a few pointers in mind can help you understand the best way to get a business loan.


What to do when applying for a business loan

A few of the guidelines to keep in mind when applying for a business loan are:

Know your credit score

Be aware of your business and personal credit score. A good credit score reflects good financial habits, and your odds of getting a business loan increase significantly. Moreover, be mindful not to apply for as many loans as possible. This can harm your business credit score and reduce your chances of loan approval.

Get a business bank account

Keeping a separate account for your business can make it easier to manage your business finances. This also acts in your favour when applying for a business loan.

Consider all your options

There are many options for financing your business (in terms of lenders and types of business loans). Take your time to understand the pros and cons of each business loan and compare interest rates and repayment options for different lenders. Once you have this information, make a well-informed decision about the best-suited choice for your business venture.

Keep necessary documents on hand

A lot of documentation is necessary when applying for a business loan, and failure to submit the proper documents can result in rejection. Be sure to review the document requirements for the loan type and lender so you can provide all the necessary information.

Learn from past mistakes

Most businesses fail to get loan approval on their first try, but many fail to identify the reason for rejection and learn from their mistakes. You must keep learning as an entrepreneur, which can help you perfect your business loan application.

Use a business loan calculator

Things to consider while applying for a business loan go beyond just how much you can get for a first-time business loan. You need to understand other costs associated with a business loan, from application costs and processing fees to interest rates. A business loan calculator can help you understand these costs and make well-informed decisions.

Work with an expert

Working with an expert allows you to leverage their experience, expertise, and resources to increase your odds of loan approval. So, don’t insist on going through the loan application process yourself.

What not to do when applying for a business loan

And some things to avoid when applying for a business loan are:

Limit yourself to local banks

There are a lot of lenders out in the market. Don’t stop at just your local banks or credit union. Reach out to other lenders; you may get more favourable loan terms.

Overestimate your income

Be realistic in your income estimate. Despite your optimism, your income may not be as high as you anticipate and having a realistic income estimate can increase your odds of getting a business loan.

Underestimate your expenses

On the flip side of income, you may end up underestimating your expenses while preparing the budget, which may influence the amount of business loan you seek. Increase your projected expenses, just to be safe, so you can cover any unforeseen expenses, and your business does not suffer because of a lack of funds.

Be vague

Have a specific business plan and budget when applying for a business loan. Lenders need to be clear on how much money you need and where the money will be invested. Beating around the bush with this information can result in loan rejection. But if the lenders see that you have a specific plan, your chances of loan approval increase significantly.

Borrow from a disreputable lender

Although seeking alternate lenders can give you favourable terms, verify the lender’s reputation. Borrowing from a disreputable lender can lend you a lot of trouble, even if their offer seems too good to be true.


What can I not use a business loan for?

You can use a business loan only for business purposes, such as business expenses, or paying salaries. You cannot use a business loan for any other purposes, such as paying off your personal loans, credit card bills, or mortgage.

What are the eligibility criteria for a business loan?

To apply for a business loan, you must:

  • Be a self-employed individual, proprietor, private or partnership firm in manufacturing, services, or trading business.
  • Have a minimum of Rs. 2 Crore or over business turnover.
  • Have a Bureau Score above 700.
  • Be in current business for at least 3 years, with a minimum of 3 years balance sheet and ITR.
  • Have had a profitable business or demonstrate that your business will be profitable.
  • Be able to provide collateral if necessary.
  • Be at least 21 years old when applying and less than 65 years old at the end of the loan term.
Take away

A business loan is an essential financing tool, allowing entrepreneurs to raise capital for their business activities, expansion, and growth. And although business loan approval rates have been increasing, applicants must understand the nuances of the business loan application process and keep some key points, such as having documentation ready, preparing a specific business plan and budget, or understanding business credit score, in mind to increase their odds of approval.

Suhas Gore
Suhas Gore

Suhas has 25 Years of experience in MSME lending having started his career as a management trainee with EFL. He has spent around 18 years in Sales and Product after which he is heading the Credit & Risk function for the last 7 years.

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