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Like all businesses, inspectors sometimes need commercial loans to run equipment, expand, or market themselves. Fortunately, lenders have money, and they want to give it to you, but you might not get the loan you need if you do not approach the situation intelligently:
Applying for a business loan is quite an effortless process. The Lenders have a defined eligibility criteria concerning the age of the applicant, business vintage, annual business turnover, etc. In addition, one must submit a few documents at the time of loan application such as KYC documents of the owner or the establishment, business address proof, financial documents, etc.
Owing to competitive reasons and the fact that business owners are short on time, most lenders have made their eligibility criteria flexible, application process easy, documentation requirements minimal and disbursement fast. Some lenders have taken the entire process digital while many others offer doorstep service if required by the customer.
Despite the simplified process, there are cases where a commercial mortgage gets rejected or is subjected to further scrutiny. Any prospective borrower needs to stay away from the mistakes that can lead to this rejection or delay. Likewise, some mistakes are to be avoided while searching for the right lender.
1. Lack of concrete business plan:
When one applies for a commercial mortgage, any lender would like to know the vision for the business. The document that best describes this vision is a business plan. It shows how one plans to grow a business over the next few years, revenue and profit projection, market analysis, winning strategies that you plan to adopt and so on.
Not having a proper business plan in place lowers the confidence of the lender, giving them the impression that one does not have the vision to take business to higher levels or that applicants are not sincere enough. Any lender would stay away from such a prospective borrower. While this is not required in the form of a project report, the same is gathered in interactions with the promoter by the lenders.
2. Insufficient Documentation:
A commercial mortgage application normally requires one to submit documents related to KYC, address proof, income proof, details of establishment, etc. It is best to keep all these documents ready so that there is no waste of time searching for them at the last moment.
Furnishing insufficient documents could give the lender the impression that either applicant is not fully compliant with the requirements or is trying to hide something. It could lead to delay in processing the loan or outright rejection.
3. Falsifying or misrepresenting financial information:
Whether the business is profitable or loss-making it is always better to reveal the actual financial situation to the lender. All businesses go through tough phases financially and hence it is better to explain to the lender the reasons for loss or low profit and plans to improve things from here on.
If a lender discovers that they have been provided with manipulated financial numbers, it will lead to outright rejection. The lender may be reluctant to lend to such a borrower in future as well.
4. Not revealing past red flags:
If there have been defaults on any loan in the past, bankruptcy or had any run-ins with the regulatory or statutory bodies, make sure the same is revealed to the lender.
Most lenders have strong mechanisms (formal and informal) for checking the borrower’s history and they may find out about these past red flags, even though one intends to hide them. In such cases, the lender may subject the application to greater scrutiny, a higher interest rate to make up for your higher risk or even reject the application altogether.
5. Not doing enough research to find the right lender:
A commercial mortgage is a widely available product with all banks and non-banking financial companies (NBFCs) offering it. With a plethora of lenders, there are several features that one needs to check before zeroing in on a lender. One must compare lender based on the interest rate, processing fee, pre-payment charges, customer service, the flexibility of tenure, maximum loan amount, ease of application, documentation requirement, the pace of approvals, etc. Take your time to do the necessary research for finding the lender that best fulfills your criteria.
6. Having a poor credit score:
A credit score is a number that reveals a customer’s creditworthiness. The higher this number, the greater the chance that the borrower will repay the loan on time. A higher credit score increases the confidence of the lender since it indicates better financial habits. It also potentially reduces the riskiness of the customer’s profile.
If one has a poor credit score, lenders may reject their application given the higher perceived risk. Hence, it always pays to maintain a good credit score through disciplined financial practices.
7. Borrowing beyond your requirement:
If you fulfill all the eligibility criteria set forth by the lender, you may be eligible for a much higher loan than they require. It is very natural to get tempted to borrow more than that for which one initially set out.
However, this temptation should be avoided, since you may end up borrowing much higher than what you can afford to repay and end up in a financial mess. Hence, stick to the initial plan as per requirement, borrow only what is required and make sure you repay it in a timely fashion.
8. Having multiple loans running simultaneously:
If one already has some loans running. It does not make sense to apply for another loan. Too many loans running simultaneously can strain cash flows and trigger a red flag for lenders. It can also be seen by lenders as a sign that one is not able to manage the expenses of the business with current cash flows. Hence, keep loans to a minimum and borrow only when required.
9. Frequently applying to multiple lenders:
Do not apply to multiple lenders simultaneously for two reasons: Firstly, it gives lenders the impression that there is a desperate need for a loan. Secondly, multiple loan enquiries could adversely affect the credit score. As mentioned earlier, take time to research well for finding a suitable lender and then apply to just that one.
10. Not reading the fine print:
While lenders advertise the major features of a loan prominently, many other things are mentioned in the fine print. Take time to read the fine print and understand all the charges, fees, foreclosure conditions, and even overdue payment penalties before one sign up for the loan. This is to ensure that one is not faced with any unexpected charges later.
To conclude, it is better to avoid the mistakes mentioned above so that your commercial mortgage application does not get rejected. A well-researched and optimally utilized loan can propel your business into the growth orbit.
A commercial mortgage is an extremely useful product for expanding your business and taking it higher. It makes sense to be fully prepared at your end before applying for a loan from a lender so that there is no delay or rejection. Borrow tightly, spend wisely, and repay timely and you can be sure of smooth sailing in your financial journey.
