Common Mistakes On Business Finance Applications

common mistakes business finance applications company loan rejection

Almost every business will have to borrow money at some stage in its development. Whether you need to secure a line of finance to cover losses during the start-up stage, or you have to acquire lending in order to expand, the day will come when you find yourself considering how best to approach your borrowing lead, and how to structure any borrowing you decide to take out. That's not a weakness - it's a strength. We all need a little help sometimes, and there's nothing wrong with taking on some borrowing so long as the borrowed money is spent wisely, and you can afford the repayments on the capital. 

Putting together a lending application can be a nervous time for a business owner, and because of that, anybody can make a mistake while doing it. We tend to be grateful for whatever we're offered, and in the process, we forget that lending is a buyer's market. So long as you're eligible for credit, you should find several companies willing to lend to you, and they'll all offer different terms. Within those terms, there are things to avoid. It's vitally important for the future of your company that you know what those things are, and why you should steer clear of them. We hope that this article will be of assistance to you when the time comes for you to borrow capital to take the next big step in your business. 

Never Agree To A Variable Rate Of Interest 

We're listing this first because it's such an important point. Sometimes, a lower rate of interest on a variable basis might look more attractive than a fixed rate because the repayments are lower. Don't be tempted. You have no control over where that variable rate might go, and if it shoots up, you'll still be expected to make the larger monthly repayments in full. Taking on a loan with a variable rate is a gamble. Imagine being forced to bet all of your income on an online slots every month. If you won you'd be delighted, but if you lost, you'd be devastated. Variable-rate loans are the lending equivalent of UK online slots. Anything can happen on any given day or month, and you have no more say in what happens next than an online slots player does when they spin the reels. Lock that interest rate down, so you always know what's expected of you in terms of repayments. 

Don’t Borrow Too Little 

Because we're nervous about borrowing, we have a tendency to borrow the bare minimum we need for the purpose we're trying to achieve. This can be a fatal mistake. If you don't borrow enough to cover every eventuality, you run the risk of leaving yourself short. As you'll know if you've been running a business for a while, unexpected expenses crop up with depressing regularity. Something will be delayed or run over budget, or require additional resources that weren't taken into account on the original business plan. If you haven't borrowed enough at the first time of asking, you'll be short of funds, and you'll be forced to go back for more borrowing. At that point, you'll be a less attractive prospect for lending, because your credit report will give lenders the impression you're desperate for credit and asking to borrow too often. Give yourself breathing room. You can always pay back any excess if you don't need it. That brings us on to our next topic: 

Avoid Early Repayment Charges 

You might have come across the phrase ‘early repayment charge’ before if you have a mortgage, where the contractual inclusion of such a charge is common practice. They're also sometimes included in business loans, or indeed loans of any kind. It's not unreasonable that lenders sometimes do this - if you repay a loan early, they miss out on the interest repayments that would have accrued over the full term of the loan. Early repayment charges give them the means to be compensated for this eventuality. Not all lenders apply these charges, though, and this comes back to what we were saying earlier about loans being a buyer's market. If everything goes well, it's in your financial interest to get debts off your books as quickly as possible. In an ideal world, you should be able to do this without being subjected to financial penalties, so discuss it with your lender or broker and check the fine print before you sign anything. 

Always Have A Solid Plan 

When you're borrowing money as an individual, for example, as a personal loan or a credit card, you won't be asked many questions about what you want to use the finance for. You'll be assessed on your individual credit rating, and you'll either be offered funding or refused accordingly. Business lending works a little differently. The loan you're offered, and the terms of that loan, will be based on the confidence the lender has in your business plan. If your business plan is vague or risky, you'll be offered an interest rate and repayment terms that reflect that level of risk. If, on the other hand, you've taken the time to put together a professional-quality business plan that outlines how the cash will be spent and how it will enable greater profitability for your company, you'll be seen as a safer bet. Safer bets get better offers. Don't rush things, and don't rule out the idea of using a professional consultant to help in putting your business plan together if you're not confident of your ability to do so yourself. 

Don’t Limit Yourself To Your Usual Bank 

Your bank may or may not specialize in business lending. Your bank may or may not have better terms than its nearest rivals. Don't feel obliged to keep all of your borrowings with your usual bank out of a sense of loyalty or convenience. This is your business and your future. There are some specialist business lending companies who don't offer consumer finance at all, and they might be able to provide you with far better terms than any 'mainstream' lender could. Be sure to see what they have to offer before you sign up with the same banking company that holds your business accounts. 

At the risk of stating the obvious, you should always check the fine print in addition to following the advice we’ve outlined above. No matter what you’ve been told verbally, there will be terms and clauses within the fine print of your credit offer which might adversely affect you if you’re unaware of them when you sign the contract. No matter how urgently you need the money or how tempted you are to sign a deal, remember that knowledge is power. You can’t plan for every eventuality, but you can eliminate many potential risks by staying fully informed of what you’re agreeing to.

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