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Help Avoid Common Mistakes When Applying for a Business Loan

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January 10 2020 • by Deirdre Jannerelli • Business, Credit, Loans

As a business owner, getting the financing you need can make all the difference to the success of your company. But when you apply for a business loan or line of credit, there are some common mistakes you’ll want to avoid so that your application doesn’t end up denied.

Here are some tips to help make the business financing application process as smooth as possible:

1.) Ensure your business is established enough. When it comes to applying for a commercial loan or a business line of credit, patience is a virtue. Realistically, most financial institutions will not offer financing to a brand-new enterprise. A good rule of thumb is to wait until you have been in business at least a year – and longer, if possible – and have established some type of financial record before approaching a lender for a business loan.

2.) Review your credit score beforehand. Before you apply for a business loan, it’s a good idea to review your own personal credit score, as well as your company’s credit score. While the two aren’t directly related, many lenders will consider both your personal and business credit files when making a loan decision, especially if you’re a sole proprietor or if you’ll be signing a personal guarantee for the loan.

First and foremost, you’ll want to make sure that all of the information in your credit files is accurate, and that there aren’t any mistakes in the reports that are decreasing your score. If you do find any errors in your credit reports, you should reach out to the credit reporting agencies directly to dispute the misinformation and get it corrected.

If you find that your credit reports are unfavorable, you should work to improve your personal credit score and improve your business credit score before you apply for a loan. Getting your scores up before applying will not only increase your chances of being approved, but it will help to ensure you get the best possible rate your lender has to offer.

3.) Prepare your financials and business plan. Your lender is going to want documentation showing that the plans you have for your business are well-thought out, as well as proof that you have the means to repay the loan in a timely manner. So, before applying for a loan, you’ll want to gather and prepare necessary documents for your business such as:
  • Six months of bank statements
  • Tax returns for the last two years
  • Recent balance sheet
  • Profit & Loss statements
  • Revenue projections
  • Current investments and assets
  • Business plan
4.) Be prepared to put up collateral. While not every business loan requires collateral, you should go into the application process with the expectation that you will have to provide some type of collateral to protect the lender’s interests. The collateral serves as a guarantee that you will repay the loan; otherwise the lender can seize the collateral for repayment. The type of collateral needed will depend on the nature of your business, but in most cases things like business real estate, business equipment, and even your personal assets can be acceptable collateral for a business loan. In the absence of these types of collateral, some lenders may require you to sign a personal guarantee. This is a document where you pledge to personally repay the debt in the event that your business is unable to.

5.) Don’t wait too long to apply. You shouldn’t wait until funds are desperately needed before approaching a lender. If your business is suffering financially, the odds of your loan being approved decrease dramatically. Consider applying for a loan or line of credit when your company’s finances and cash flow are in good shape. In other words, think of a business loan as a way to grow or expand your business, rather than a way to rescue it.

Another problem with waiting until the last minute to apply for a business loan is that you may lose out on the best terms if you do so. While there are many online lenders out there who offer fast business financing, many of their loan products have significantly higher interest rates than those offered by traditional lenders like banks and credit unions. By giving yourself enough time to compare financing options from a variety of lenders, you’ll have the best chance at minimizing your borrowing costs. And, some traditional lenders do offer expedited turnaround times on certain products, like BankFive does with its Express5 business loans. So, going with a local bank for your business financing needs doesn’t necessarily mean a lengthy drawn-out process.

6.) Apply for the right type of financing. Business loans are not one-size-fits-all. The right type of financing for one operation could be the wrong one for another company. For example, if your business only needs a short-term loan, there is little point in seeking long-term financing, and vice versa. Familiarize yourself with the types of loans available and find one that best suits your needs.

Many lenders offer an array of commercial financing options including SBA loans, equipment loans, commercial mortgages, and lines of credit. If you’re not sure what lending product is right for your business, it’s a good idea to speak with a commercial lender who can help steer you toward the right solution for your company’s unique situation and goals.

7.) Request enough money. One of the biggest mistakes applicants make when applying for a business loan is not requesting enough money. You don’t want to close on a loan only to have to go back to the lender in a few months for more funding. For this reason, it’s wise to do some research beforehand to get a solid, realistic idea of how much money your business needs, and request slightly more than that amount so you will have enough to cover any unanticipated expenses that might pop up. However, you’ll need to be sure you can comfortably repay whatever amount you request so you don’t end up defaulting on your loan.

8.) Take care when filling out your business loan application. The documentation you provide in your business loan application critically affects whether or not the financing will be approved. Far too often, business loan applicants fail to include accurate financial data with their applications, resulting in denial.

Never lie about your credit score or any other financial information on your business loan application. Lenders have many different ways of verifying information provided in loan applications, and if you’re found to be untruthful, it can raise serious red flags and could potentially result in your application being denied, or could significantly reduce the amount of money they’ll allow you to borrow.

Applying for business financing can seem a bit daunting, especially when there are so many mistakes that can be made during the application process. But with good planning and some due diligence, you can avoid these common application errors and increase your chances of securing the funds your business needs to thrive.

Our commercial lending experts are happy to help answer any questions you have about applying for a business loan. Contact us today!