Mistakes to Avoid When Filing a Small Business Loan Application
Being an entrepreneur not only requires a business idea, but also depends 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 what would have been a global idea of change. There are many financial institutions nowadays ready to fund brilliant entrepreneurial ideas, but you can only get financial support if you present yourself as a solid business package.
All financial decisions are not made in a vacuum. Banks make a complete assessment of all applications before approving. Unfortunately, many small business owners lose these loans and it is not because of scattered business ideas, but it is due to the lack of clarity about loan applications. A single error in an application may cause you to be declined. In many cases, it is due to think that some parts of the loan application or certain requested information will not be examined by the lender.
However, to avoid possibly being rejected, here are the common small business loan application errors to note.
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 finances. Unfortunately, all banks need this information to determine business stability before risking the money. If your goal is to expand your business, any financial institution would like to know if the business you are financing is able to repay the loan or support itself in the near future. Any financial information about your business should be clear and tangible.
Because banks need this information, most small business owners end up compiling data to please the bank, forgetting that a bank can still verify the information in their app. This leads to loan declines if the verification process shows different numbers from the ones you submitted. It is good to be honest with the information you fill out the loan application forms since when it is found to be true you will definitely get a loan although the amount could be less than what you requested.
If you want to increase the chances of business approvals, please submit honest balance sheets, cash flow statements and any other relevant documents requested.
No clarity in the use of funds
Any credit organization would take a close look at how any loan seeker intends to use the funds to boost the production of their business. Unfortunately, the most common is that small business owners do not have a clear and well described idea of how they will spend the money they are requesting. This leads to loan denials by most lenders since a lender wants to lend money so that you can increase business income and be able to repay the loan with interest.
Banks want you to spend money on the right things that will improve the position of your current business. The lender wants to see the needs of your business and assess whether the money to be borrowed is sufficient to meet those needs. You need to show banks that if you get the loan, it should be used to improve the performance of your business and make a positive impact. Make your points sound and explain the benefits you can get if you get the finances you need. To summarize, you need to be very brief and straightforward in designing your needs and how these funds will help you get your idea started or grow your business.
Not Knowing Your Credit Ratings
The mistake of not knowing your personal credit ratings before applying for a loan can lead to a loan refusal if your credit has problems you may not be aware of. Credit reports clearly describe how reliable you are when it comes to paying bills and any debts. The figure can tell if someone can trust you with their money or not. Some of us don’t even check our credit reports on a regular basis. You should use this as a springboard for your business success.
The good news is that the higher the credit rating you have, the greater the chances of your loan being approved. In addition, the loan can be approved faster compared to those with low credit ratings. So, before making any loan approvals, make sure your report invoices are up to date and make sure there are no errors in the report that could be causing a low rating. When done, your business loan will be approved earlier than expected.
Late Loan Application
It is vital to note that most small business owners wait until it is too late before submitting the loan application. Most of the time, they are desperate for funds. This makes them fall for any offer. Some of these offers that small business owners take on end up with very high interest rates and other unfavorable terms. To prevent all of this from happening to you, you must take quality time and shop around for the best loan deals in town before making a choice. Before making a choice, however, it is always to do so slowly, giving yourself time to evaluate 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 if it satisfies you. By doing so, you will be able to get the best option. In addition, you will also have time to get all the information the bank needs for faster loan approval.
No business plans
When you are leaving on a journey, you have to have the road map to your destination. The same applies to business. You must have a roadmap that clearly shows how you want to operate your business for growth purposes. The business plan should then be submitted with your
applications. Most banks and other financial institutions need someone who has goals, ambitions, and target markets already mapped out. The market gap you are trying to capture needs to be worked out. In short, you have to show the lender how injecting money into your business will be able to generate more revenue.
When you do a thorough research on your business plan, it shows potential lenders that you really know what you want and you are familiar with what you want to achieve. In addition, if your plan has great potential for attracting revenue, lenders will quickly make money in your account as they are confident that the company has the potential to repay you without financial difficulty. An appropriate business plan should have issues such as target market, business objectives as well as expected future growth, among others.
Apply for the wrong type of loan
From the financial expert’s point of view, before any business owner borrows, he should consider not only the capital he needs but also the type of loan that works for this area. There are different types of loans designed to meet the different needs of companies 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 intended for those needs.
Most of the time, small business loan applications are declined by banks, not because the idea is vague, but because of a mismatch in applications. The demand you have as a business has to match what you request. For example, a business owner should not apply for a short term loan to finance his vehicle. This is unrealistic and the bank will have no choice but to reject your application. It is also good to note that each type of loan comes in a unique package that 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 may 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 that meets your needs before making any application to reduce the chances of rejection.
Changing the business structure
One of the mistakes most business owners make is restructuring the business days before applying for a loan. This could be misperceived by lenders, assuming there could have been something wrong with managing the business. They also want to see business stability in terms of suppliers with whom you work regularly and so on. In short, the businesses you run need to have a history from which banks can get tangible information. This may seem like a problem, but for the lender, it is very important.
If you are an individual company, it is good not to change the type of vendor you are working with. This is because the supplier change may be flagged by the bank so that you may not have been able to pay off the previous supplier’s debts and so on. Therefore, it is not advisable to change what you have been doing or who you are working with days before making any commercial loan application.
Do not read loan terms before signing
Any business owner should never wait for a financial crisis before they can apply for a loan. It could get you in bigger trouble than the cash crunch you could be having. However, if you wait until the problem is at your doorstep, you will be desperate to find someone who can inject money to save your business without being interested in the critical information you hire. Some lenders could manipulate you to sign loans that could bring you more problems in the future financially.
This is why it is always wise to take time before signing any kind of commercial loan. Take the time to ask as many questions as possible about the loan you want to apply. This will be good for you and your own business.
The small mistakes mentioned above made 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 the idea is captured, but also the critical information provided in the application itself. In fact, the information is more scrutinized as it is necessary to make sense before the loan is approved.
Thus, it is important that both new and experienced entrepreneurs make sure that the information presented is acceptable and free from the above errors. It is good to note that these are simple mistakes that make us lose very lucrative loan applications. Your business idea should be articulated and give the lender an insight into where your vision is.