As the economy keeps expanding in India, small businesses often see business loans as a lifeline. Yet, getting one can be a bit of a hurdle. Issues like limited access to funds, unclear terms, and the requirement for collateral can pose challenges. But once you secure that loan, it opens the door — whether it’s bridging cash gasps, hiring new talent, fixing or upgrading equipment — effective measures to propel your business forward, increase earning, and foster growth.
Top 8 Common Challenges Faced When Applying for Business Loans
Here are the top 8 common challenges applicants face while applying for a loan for business —
- Proper Documents: Applying for a loan can be quite a process. It involves a ton of paperwork, which can feel overwhelming and distract you from running your business smoothly. Meeting all the documentation requirements can be tricky, especially if you don’t have everything the lender asks for. Sometimes, business owners turn to local lenders who may take advantage of the situation when official channels aren’t an option.
- Cash Flow Maintenance: To steer clear of this problem, it’s crucial to plan for your business. Having a budget and foresight at the beginning of each month can help ensure you’ve got enough funds for smooth operations, no matter how much revenue your business generates. If you find yourself short on cash for a few months, it can put you in a tough spot. So, planning and being proactive about securing funds when needed is key to keeping your business running smoothly.
- Lengthy Process: Getting a business loan in India can be a real hassle. First, you apply and submit the requisite documents. But that’s just the beginning of a long, drawn-out process. Lenders meticulously scrutinise every detail multiple times. They need countless signatures across various documents to ensure you’re committed to repaying. On top of that, they seem to call you endlessly, asking about your business, when it started, and how much revenue you earn. It feels like forever before you hear whether they’ve approved or declined your loan. Meanwhile, your plans to expand your business are stuck in limbo, potentially affecting your revenue goals.
- Requirement of Collateral: Even though the Ministry of Small and Medium Enterprises and the RBI have tried to make financing more accessible, entrepreneurs still face hurdles when seeking credit. Typically, banks and financial institutions insist on collateral or traditional security for business loan applicants. Due to their size and local presence, many small business owners struggle to provide such collateral, making it difficult to secure the funding they need to grow their businesses. To address this issue, unsecured loans from NBFCs or banks can be a lifeline for entrepreneurs and small business owners. These loans are offered without the need for collateral, ensuring that business owners can access the funds they require.
- Processing Time: Even if you’ve gathered all your documents, the real issue persists because the processing time with lending institutions is excessively long. You submit your paperwork, and they verify it, and that alone takes considerable time, especially with many others applying as well. With 72% of individuals aged 25 to 34 aspiring to start their businesses, your application ends up in a queue. By the time you hear back, your competitors could be miles ahead. And even after waiting, there’s no guarantee you’ll get approved.
- Loans with Smaller Amounts: Getting a loan for business in India usually start with a smaller amount. Banks and financial institutions are cautious about lending to new entrepreneurs because of the risk involved if the business doesn’t succeed. They prefer to begin with a lower amount to assess how well the business owner manages loan repayments. After about six months of good repayment history, they might consider increasing the loan amount gradually. This cautious approach helps banks feel more secure, but it often means businesses have to adjust their plans based on the funding they receive. Sometimes, business owners end up cancelling their loan applications because the amount offered doesn’t meet their needs. Others shop around different banks until they find one willing to provide the exact amount they require.
- Lack of Business Plan: In any business venture, having a clear and comprehensive business plan is crucial for success. Your plan should detail all expected expenses, such as salaries, rent, and inventory costs, and outline your scalability, market size, competition, product development, marketing strategy, cost competitiveness, management capabilities, and overall strategic roadmap. A solid business plan not only demonstrates potential profitability but also acknowledges potential risks and worst-case scenarios. These elements are essential when preparing your plan. Unfortunately, some business owners overlook these critical aspects, leading to their loan applications being rejected.
- Stressful Environment: Running a business is full of excitement but comes with its share of stress and challenges. The last thing any entrepreneur wants is unnecessary anxiety when he/she needs credit. Perhaps you’re seeking funds to upgrade technology or secure a big deal, and you need a straightforward process from reputable lenders offering quick and easy loan applications.
You’ve been eagerly awaiting the day you’d receive a message confirming the credited amount into your account. After waiting for at least a month, instead of approval, you received the disappointing news of your loan application being declined due to another issue found in your credit history. This is a common experience for entrepreneurs in India. The main frustration lies in the lengthy time banks take to deliver the final decision. It’s frustrating when delays like this affect your business plans, but it’s essential to keep exploring options with lenders who can offer a more streamlined approach.
Conclusion
Entrepreneurs commonly use business loans to keep cash flow steady and cover day-to-day operational expenses. Sometimes, unexpected financial needs crop up, prompting businesses to seek these loans. Since they don’t require collateral, unsecured business loans are popular among individuals looking to navigate their businesses toward growth more flexibly. It is obvious to face these issues while applying for a loan; however, checking the documents and completing the procedure properly will help you overcome these hurdles.
