The need for funds remains constant through the different stages of business management—initially, for setting up the business, then for staff expansion and digitisation, and finally, for project financing or expanding the reach. So, no wonder, small business loans remain one of the most preferred financing products among borrowers. While the answer to how to get a small business loan is quite simple, what you must be concerned about are the small business loan mistakes made by first-time loan recipients. Today, let us look at the most common small business loan mistakes in India and ways to avoid them.
5 Common Small Business Loan Mistakes to Avoid
1. Skipping Payment Deadlines
How many times have you missed an EMI on your ? Once? Twice? Thrice? Or is it even more? And, how many times did you run out of money throughout these skips? Missing an EMI does not always imply that a company is cash-strapped. Sometimes, you may have forgotten to pay your dues, while at other times, you may not have enough cash on hand owing to other business responsibilities. However,
missing EMIs has a long-term negative impact on your credit history as well as on your borrowing capability.As a result, keep track of your EMI due date and avoid this common small business loan mistake.
Also Read: How To Repay Business Loan If Business Is Incurring Losses 2. Ignorant in Communicating Cash Flow Issues
Having a
cash flow issue is common in business. Sometimes, you may have a lot of liquidity on hand, while your funds may be vested in business endeavours at other times. In any case, be loyal to your lender when you
apply for a small business loan and the funds are disbursed into your account. Inform them if your business is experiencing cash flow issues. By sharing your concerns early with the lending institutions, you both will have sufficient time to work out an alternative loan structure.
3. Misunderstanding the Associated Loan Cost
Financial jargon, as well as
financial terms and conditions, are difficult to comprehend. If you are a first-time small business loan borrower, you might simply think about the small business loan interest rate.
However, every loan has some cost associated with it. These costs include processing fees, foreclosure charges, and restructuring charges, among others. Even though the fees are minimal, you must know exactly how much funds are flowing in and out of your business's account every month to monitor your cash flow and make timely payments.
Furthermore, if you have a floating rate on your small business loan without collateral, make sure you know how much your monthly instalment will vary if your interest rate changes.
Also Read: How to Improve the Credit Score for your Business 4. Miscalculating Required Funds
If you have just launched your business, it is normal to misjudge the amount of money you will need to operate a business. An inexperienced business owner may not be able to make a financial layout that specifies funds allocation. As such, they either underestimate or over-leverage the small business loan amount required for business expansion.
This is one of the common small business loan mistakes in India that people make. In the preceding instances, either you pay a higher portion of the or cannot meet your requirements due to underestimation. To prevent such a , carefully examine your requirements before
5. Not Strengthening Relationship with Lender
Building an everlasting relationship with the lending institution is the key to a successful business. Nurturing your relationship with the
lending institution is as crucial as getting a small business loan for your company. Being unresponsive and unorganised could hamper the borrower-lender relationship, causing problems in future.
However, this small business loan mistake is simple to avoid. Just keep your word, stay on top of your
EMI payments, and act professionally.
Also Read: Growth Strategies for Small Businesses To Conclude
Defaulting on a loan is one of the most common causes of business failure. Even if you have paid off your previous small business loans, that doesn't always imply that you got the best deal possible. You may have incurred avoidable costs in the form of penalties, late fees, unsuccessful payment charges, and more. To ensure you are reaping maximum benefits from your
small business loan, avoid the common small business loan mistakes at all costs.
