Getting an application for a loan approved can be daunting for both first-timers and old hands alike. That notwithstanding, most of us will at some point in our lives take out a loan to finance a purchase- a house, land, car, machinery, or boost a business. Some people have failed to obtain loans simply due to certain lapses in the application processes which can be avoided.
Here are 10 common mistakes to avoid in order to ensure your loan gets approved and that you achieve the purpose for which you applied for it.
Not checking your credit history- If you had taken a loan earlier, that information and your repayment status (credit profile) is held at the Credit Reference Bureau (CRB). Any financial institution can, and will, check that information before approving a new loan application. If you ever defaulted on a loan, it will negatively impact on your chances of getting a new one. So before you send your application, it is advisable to check it in case of any irregularities and fix them in advance.
Not investing your time- Take time to find out what is required by your preferred lender for the type of financing you are seeking. Put together your documentation like the life of your business depends on it. The more time you spend preparing these details for your application, the higher the chances of having it approved.
Borrowing money on security alone instead of ability to repay- Your security is what you declare to the bank that in case you fail to repay, they can come for it. This could be land, a house or your car. But you need to have a source of income, from which you’ll repay the loan- a salary or a business. That is what the bank bases its decision to lend or not to.
Borrowing for speculative purposes – This is like negotiating a daily milk supply with your neighbour on the promise that you’ll repay when your own cow gives birth. Things have a clever way of going wrong, remember. Buying land hoping its value will appreciate after a few years is not a good premise on which to borrow money. Borrow only to make the money work for you.
Diversion of borrowed funds – We like to rationalize and say, if you take money from your right side pocket and put it in your left side pocket, it’s still your money, right? Wrong! In business, that could change so many things and make you a victim of your own decisions. For instance, you borrow money to buy land and then you end up buying a car. You’ve not only created for yourself a new problem, but also postponed the initial plan, at cost of course.
Borrowing for start up businesses – The excitement of a new business idea can make you do anything to raise capital. A bank loan is good option when you do not have your own capital, or you can’t get it elsewhere. The problem with borrowing for a startup is you cannot tell if it will make profit or not, and you risk defaulting on your repayment in case of losses.
Borrowing without understanding the business cash flow cycle- Every business has a period when sales are high. For some it’s every month, while others could take longer. Others have irregular cycles. For example, the tourism industry has a high and low season. Schools receive money only once every three months. Other businesses make their highest sales during holidays. When you understand your business cash flow cycle, you can structure your loan repayment installments with your bank so that you only pay when your business is making sales. If you are salaried and are paid every three months, you cannot negotiate for monthly installments.
Failure to disclose full information to the lender about the purpose of the loan- it is important to reveal to your bank the purpose for which you will use the loan. When the bank understands your purpose for the loan, it can structure your repayment terms to suit your needs.
Multi borrowing from different entities for the same reason – Avoid the temptation to apply for multiple facilities from different institutions for the same purpose. Doing so forces you to make commitments to several lenders at the same time, and honouring each of them could be a big challenge.
Choosing your lender- Many borrowers prefer to stay in their comfort zone, retaining their existing lender for subsequent loans. By the same token, the lowest interest rate can often be the carrot that attracts an inexperienced borrower to a particular lender over another. Generally speaking, the interest rate should not make or break the deal. You can always negotiate for a favourable rate with your lender, even after you’ve committed to them.
So if you have been hesitant to borrow to boost your business because you didn’t know what to do or not do, fear no more. What are you waiting for? We at ABC Bank are out to help you achieve the extraordinary in your business. Talk2us@abcthebank.com today.