The most common question that small business owners ask regarding their loan application is “Why did I not get approved?” Even if you pay all your bills on time, have a strong business credit score, and have a skyrocketing revenue, you can still get rejected on your application form. If you find yourself perplexed when this happens, you’re probably disregarding the many small details that go into the decision-making process of lending.
There are many small business loan options out there, and each has its own specific criteria for approval. The application process can prove to be nerve-wracking, and sometimes even a few small mistakes on your application form can instantly plummet your chances of approval.
So let’s take a look at 8 small business application mistakes, and how to avoid them:
1 – No updated financial records
This is one of the most common mistakes that small business owners make. Every bank, and the majority of alternative lenders, require your up-to-date financial information to evaluate whether your business is stable enough before lending money to it. If you want to expand your already established small business, financial institutions will want to know if you are able to repay the loan while sustaining your business in the future. All of your financial information must be clear and concise.
Avoid faking figures or misrepresenting your business’s financial performance in an attempt to trick the financial institution you’re applying for a loan from. They can verify all the information on your application, and if they notice the figures you submit are inaccurate, your loan application will get denied. In short, it’s wise to be honest about all the information you provide when applying for a loan.
2 – No explanation of use of funds
All loan providers want to know what your business will use the funds for. If you don’t have a clear and well-planned out idea on how you are going to spend the money you are requesting, you will get denied. This is because lenders want to provide businesses with capital that can be used to increase their revenue, which increases the likelihood that they’ll be able to pay back the loan in full. They want to avoid lending to businesses who would use the funds irresponsibly, or in a manner that would not directly translate to the growth and prosperity of the business.
Lenders will want to see the needs of your business and evaluate if the amount you are requesting is enough to meet those requirements, so it’s best to have a plan ready beforehand. Start by creating a brief summary of your business and an explanation of all the benefits your business will gain if you receive funding.
3 – Not knowing your credit scores
Perhaps the biggest mistake is not knowing your personal credit score prior to applying for a small business loan. All banks and alternative lenders have minimum credit score requirements for borrowers. If your credit score is below a certain threshold, your application won’t even make it to human review. When lenders pull your credit score, they also pull a copy of your credit report. Not only do credit reports indicate an individual’s dependability when it comes to paying their bills on time, they also host valuable information such as outstanding collection items (unpaid bills), bankruptcies, taxes owing, and active lines of credit (number of credit cards open at a given time). You should check your personal credit score on a regular basis to make sure its strong enough to meet the requirements of business lenders.
Also, check your credit report and make sure all of your information is up to date. If you notice any errors on the credit report (which can cause a low rating) you can always dispute it through credit bureaus.
4 – Lack of a business plan
When applying for a loan, its best to provide a clear plan of what your business does, how you are generating revenue, how you’re going to continue increasing your customer base, and any other future growth plans for the business. You may already have all these planned out in your head, but when it’s not written down anywhere, lenders have no way of finding out what your intentions are for your business. That’s why it’s important to create a detailed, and well-articulated, business plan and submit it along with your small business loan application.
Keep in mind that if lenders see that your business plan has the potential to gain revenue, they will be more likely to approve your loan application. This is because they’ll have a better understanding of how you intend to repay the loan without any financial difficulties.
5 – Failure to read loan terms before signing
Don’t wait for a financial crisis to hit your business until you apply for a small business loan. If you wait until then, you become desperate and end up signing forms by lenders that could put you in more financial trouble. That’s why it’s wise to take your time before signing a small business loan agreement. Make sure you fully read the fine print and see answers to the following questions in the agreement:
Is there a clear interest rate, payment schedule and exact amount that you will be responsible for?
Does the loan have an early re-payment penalty?
What fees are associated with late payments?
What is the total cost of your loan and what are the interest rates?
If you have further questions or concerns, be sure to talk to your lender, a legal advisor or a small business advisor at Lending Loop.
6 – Changing business structure
Another big mistake is reconfiguring the legal structure of the business just a few days before the loan application. When lenders see this, they will automatically assume that there is something wrong with your management system, which might lead them to believe that your business is unstable. Your small business must have a history of management along with all its tangible information.
If your business is a sole proprietorship, it’s best not to change the vendor you have been working with. This is seen as a red flag by lenders that you were unable to pay off the debt of the previous vendor.
This leads us to the next point.
7 – Forgetting about existing debt
If you have any outstanding debt from previous lenders, it can affect your ability to get and repay, new loans you’re trying to apply for. It’s best to satisfy any outstanding financial obligations before applying for a new loan. If you have too many debts to repay, you will have a difficult time running your small business. Even if you are in desperate need of working capital, you should try to pay back your debts first, then start applying for a small business loan once your financial standing is in better shape. Lending Loop can help you refinance any outstanding debts.
8 – Applying for the wrong business loan
Before applying for a loan, you should consider not only the amount of capital you need but also what type of small business loan works best for your needs. There are many different types of loans that cater to different business needs. When evaluating what loan is right for your business, you should match your financial needs with every different type of loan. In the majority of the cases, small business loan applications get rejected by lenders because the requested loan didn’t match the application. For instance, if you are looking to finance a vehicle, you shouldn’t apply for a short-term loan.
Alternative lenders have made it much easier for small businesses to obtain the right working capital to achieve their business goals. But at the end of the day, it’s up to you as a small business owner to thoroughly do your research and complete a loan application that will provide you with exactly the kind of loan you are looking for. Speak to a financial advisor if necessary and make sure you are all prepared for receiving the right business loan at the right price.
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