Mistakes to Avoid When Completing a Small Business Loan Application
Improve your chances for securing the loan your company needs
Being an entrepreneur not only requires a business idea but also relies on raising capital. Realistically, no business can be started or expanded without cash flow. Small business owners often have financial difficulties that make most of them give up on what would have been a global changing idea. There are many financial institutions nowadays ready to finance brilliant entrepreneurial ideas but you can only get the financial backing if you represent yourself as a solid business package.
All financial decisions are not made in a vacuum. Banks do a thorough assessment of all applications before making an approval. Unfortunately, many small business owners miss out on these loans and it's not because of scattered business ideas but it's due to a lack of clarity on the loan applications. A single mistake in an application can get you declined. In many cases, it is due to thinking that some parts of the loan application or certain information requested won’t be examined by the lender.
However, to avoid possibly being rejected, here are common small business loan application mistakes to watch out for.
Not Having Updated Financial Records
The common mistake that many small business owners make when seeking a loan from any financial institution is not investing more time to work on their financials. Unfortunately, all the banks need this information to determine how stable your business is before risking the money in it. If your aim is to expand your business, any financial institution would want to know if the business they are funding is able to repay the loan or can sustain itself in the near future. Any financial information regarding your business should be clear and tangible.
Since banks need this information, most small business owners end up cooking figures in order to please the bank forgetting that a bank can still verify the information on your application. This leads to loan denials if the verification process shows different figures from what you submitted. It is good to be honest with the information that you fill in the loan application forms since when it is found to be true, you will definitely get a loan although the amount could be lower than what you requested. If you want to increase chances for business approvals, present honest balance sheets, cash flow statements and any other relevant documents requested.
No Clarity on Use of Funds
Any lending organization would have a keen eye on how any loan applicant intends to use the funds so as to boost the production of their business. Unfortunately, the most common thing is that small business owners do not have a clear well-described idea on how they are going to spend the money they are requesting. This leads to loan denials by most lenders since a lender wants to lend you money so that you can increase the revenues of the business and be able to repay back the loan with interest.
Banks want you to spend money on the right things that will improve your current business’ position. The lender wants to see the needs of your business and evaluate whether the money to be borrowed is enough to meet those needs. You need to show the banks that if you get the loan, it should be used to improve the performance of your venture and create a positive impact. Make your points sound and explain the benefits you might get if you get the finances you need. As a summary, you need to be very brief and to the point when elaborating your needs and how these funds are going to help you start your idea or expand your business.
Not Knowing Your Credit Ratings
The mistake of not knowing your personal credit ratings before applying for a loan may lead to a loan denial if your credit has issues that you may not be aware of. The credit reports clearly outline how dependable are you when it comes to payment of bills and any debts. The figure can tell whether someone can trust you with their money or not. Some of us do not even check our credit reports on a regular basis. You should use this as a stepping stone to your entrepreneurial success.
The good news is that the higher the credit rating you have, the higher the chances for your loan to be approved. In addition, the loan can be approved faster compared to those with low credit ratings. Thus, before making any loan approval, ensure that the bills on your report are up to date and verify that there are no errors in the report that could be causing a low rating. When done, your business loan will get approved sooner than you expected.
Late Loan Application
It is vital to note that most of the small business owners wait until it is too late before they submit their business loan application. Most of these times are when they are desperate for funds. This makes them fall for any offer. Some of these offers that small business holders take up end up with very high interest rates and other unfavorable terms. To avoid all this happening to you, you should take quality time and shop around for the best loan deals in town before making a choice. Before making a choice though, it is always to do it slowly giving yourself time for evaluation of the different choices. You need to find
a lender whose financial offers match your needs. You need to weigh what they have on the table and whether it satisfies you. By so doing, you will be able to end up with the best option. Furthermore, you will also have time to get all the information that the bank needs for faster loan approval.
No Business Plan
When you are going out on a journey, you have to have the road map for your destination. The same applies to business. You should have a roadmap that clearly shows how you want to operate your business for growth purposes. The business plan should then be submitted along with your
applications. Most of the banks and other financial institutions need someone who has goals, has ambition and has the target market already mapped out. The market gap you are trying to capture has to be elaborated. In short, you have to show the lender how injecting money into your business will be able to generate more revenue.
When you do thorough research on your business plan, it shows potential lenders that indeed you know what you want and you are conversant with what you want to achieve. Furthermore, if your plan has a great potential to attract revenue, the lenders will quickly disburse money into your account since they are sure that the business has the potential to repay it back without any financial difficulties. A proper business plan should have issues such as the target market, the goals of the business as well as the expected future growth among others.
Applying for the Wrong Type of Loan
From a financial expert point of view, before any business owner applies for a loan, he/ she has to consider not only the capital they need but also the type of loan that works for that area. There are different types of loans meant to cater for different needs of businesses and therefore if you want to borrow from any of the financial institutions, you have to match your financial needs with the type of loans meant for such needs.
Most of the times small business loan applications get turned down by banks not because the idea was vague but because of a mismatch in the applications. The demand you have as a business has to coincide with what you apply for. For instance, a business owner is not supposed to apply for a short-term loan to finance their vehicle. This is unrealistic and the bank won't have any other option other than to reject your application. It is also good to note that every type of loan comes in a unique package which has a different interest rate, the length of the repayment period and so on. This means that if you apply for the wrong type of loan, it could end up costing you even more on the interest rate. Therefore, it is always good that you do background research on the type of loan available which suits your needs before making any application to reduce the chances of rejection.
Altering the Business Structure
One of the mistakes that most business owners do is restructuring the business days before the loan application. Doing so could be perceived wrongly by the lenders by assuming that there could have been something wrong with the business management. They also want to see stability in the business in terms of the vendors that you regularly work with and so on. In short, the business that you run has to have a history from which the banks can get tangible information from. This could seem like a non-issue but to the lender, it is very key. If it is a sole proprietorship, it is good not to change the type of vendor you have been working with. This is because changing the vendor could be red flagged by the bank that maybe you were not able to pay off the debts of the previous vendor and so on. Therefore, it is not advisable to change what you have been doing or whom you have been working with days before you make any business loan application.
Not Reading the Loan Terms Before Signing
Any business owner should never wait for a financial crisis to happen for them to apply for a loan. It could land you in bigger trouble than the cash crisis that you could be having. However, if you wait till trouble is at your doorstep, you will be desperate to find anyone who can inject money to save your business without being keen on critical information you sign against. Some lenders could manipulate you to sign loans that could land you in more trouble in the future financially.
This is why it is always good to take time before you sign any type of business loan. Have a span of time to make as many inquiries as possible about the loan you want to apply. This will be good for you as well as for your own business.
The above minor mistakes by small business owners when making their loan applications contribute to a higher percentage of rejection compared to bad ideas. This shows that before any loan application is accepted, not only is the idea captured but also the critical information that is provided on the application itself. As a matter of fact, the information is more scrutinized since it has to make sense before the loan is approved.
Thus, it is important for both new and experienced entrepreneurs to make sure that the information submitted is acceptable and free from the above mistakes. It is good to note that these are simple mistakes that make us miss out on very lucrative loan applications. Your business idea should be articulate and give the lender an insight on where your vision is.