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Common Mistakes by E-Commerce Startup Owners That Lead to Loans Being Refused

Common Mistakes by E-Commerce Startup Owners That Lead to Loans Being Refused
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Of all the industries that have attracted entrepreneurs in the new millennium, e-commerce is unarguably the most popular. However, e-commerce businesses despite being less capital intensive than traditional manufacturing or retailing industries find it very difficult, especially in their early days to find enough funds. https://www.inc.com has quoted the Federal Reserve reporting that some 45% of all small-business owners applied for credit in 2016, more than double the number in 2014. However, many requests for small business loans are turned down because of mistakes made by the entrepreneurs in the application process. Some of the most common mistakes that owners of e-commerce startups make include:

Loan Application Incomplete

Every lender has an application form in a specific format that requires to be filled up in detail by the prospective borrower. The application process also demands that various documents be enclosed; typically, these include business plans and projections, cash flow statements, statements of bank accounts, balance sheet, and profit & loss account statements, tax returns, credit score and more. These documents enable lenders to make sure that the business plan is solid and the entrepreneur has the necessary competence to make the business venture a success and ensure that the loans can be repaid on time. Application packages when left incomplete do not give the full picture to the lender and as a result, they do not get the confidence to extend the requested loan. Incomplete applications also signal a lack of attention to detail by the borrower or worse, intent to deceive the lender.

Inadequate Cash Flow

More than the profitability of the e-commerce venture, any lender will give attention to the cash flow of the business. When the business has a steady cash flow and the amount is enough to cover the monthly repayment of the requested loan, it gives the lender a sense of confidence that the business is stable and the risk of default is minimal. Typically, the lender will ask for the bank statements of the business and examine the movement of the money flowing in and out of the account. If the present cash flow is uncertain and inadequate, the borrower will have to convince the lender that the additional debt will help them to improve the cash flow and attain financial stability.

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Lack of a Robust and Foolproof Business Plan

One of the most vital elements of getting a business loan approved for your e-commerce venture is a lucidly presented and comprehensive business plan. The plan should give details of the concept, the goals of the business, and its primary target audience. It should also detail the existing competition and how the company intends to be better than them, the biographies of the founders and the executive team, not to speak of the marketing plan and the revenue projections of the short and medium terms. The executive summary should invariably accompany the detailed business plan; this is typically a one-page summary that provides a synopsis of the business plan. Not only does the business plan help you to understand how much funds are required but also how to convince lenders that your venture is a viable business opportunity for them.

Miscalculating the Amount of Money Required

While the business plan will have detailed financial projections, getting the actual quantum of the loan right can be very difficult. Often, in a bid to facilitate the loan approval, entrepreneurs tend to underestimate the amount. Under these circumstances, they often find themselves asking for more very soon because without the additional funds being available, the future of the enterprise could be jeopardized. A repeat visit is not looked upon kindly by a lender as it points to the incompetence of the entrepreneur. Asking for more funds than actually required is also a very common mistake though most loan disbursals are tied to specific mileposts being achieved. Excess debt on the books creates an unnecessary pressure on the cash flow, as the interest and principal have to be repaid monthly. If managing high-interest debts becomes a problem, e-commerce entrepreneurs can examine the possibility of debt consolidation with the help of specialized companies.

Founders Not Having Adequate Stake in the Business

Most lenders require the founders of the business to have a sufficient stake in the e-commerce business as a prerequisite for the loan approval. This is because the lender does not want to fund a business where the founders can just walk away if the business fails, leaving them to hold the can. When the founders have a sufficient equity stake in the business, it is seen as a sign of confidence in the future of the e-commerce venture. Depending on the type of the loan, some lenders may even insist on collaterals as a security to back the loan to mitigate the risk. Typically, collaterals are provided in the form of securities, equipment, or real estate titles.

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Not Having a Passable Credit Score

Even though a lender will lay great importance on the business plan to establish the viability of the e-commerce business, it will also depend on the verification of the credit report of the entrepreneur to find out how financially responsible he has been in the past. It is quite common for loan applications to be rejected if the credit report is too low or contains errors that disqualify the loan application. Ideally, you should obtain a copy of your credit report from all the three main credit rating bureaus, Equifax, TransUnion, and Experian and ascertain that there are no errors that are driving your score down. Remember, the better your credit score, the easier it is to become eligible for a loan and the lower the rates of interest applicable.

Conclusion

Taking on debt to establish an e-commerce business is a serious matter that needs a lot of preparation to avoid disappointment. A mistake in the loan application process can result in the loan being rejected or the process of approval being unnecessarily protracted leading to missed market opportunities. Taking heed of common mistakes can help you to avoid them and get the loan without any strain.

Author Bio: Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She has previously covered an extensive range of topics in her posts, including money saving, Budgeting, business debt consolidation, business and start-ups.