By Annabelle Short
I often hear business owners, and individuals alike, say they have no idea why they are unable to get approved for a loan. They make plenty of money, use their credit cards responsibly, and never make late payments.
However, they are often oblivious to the all the little details that go into the decision-making process of lending.
If you’re looking for advice on applying for a business loan, you are probably in one of two situations:
- You have applied for a business loan and were rejected.
- You are planning to apply for a business loan, but you have no idea how to ensure approval.
Chances are, at some point in the life of your business, you will need an injection of capital—big or small. But, with so many business funding options out there, all with their own requirements and criteria for approval, getting a business loan can be a nerve-wracking experience.
Did you know just a few small mistakes on your business loan application can virtually kill your chances of getting approved?
And, several of these mistakes could be avoided…
Common Mistakes to Avoid When Applying for a Business Loan
Before you receive the dreaded denial letter due to a small mistake, get familiar with some of the most common business funding mistakes to avoid:
1. Not knowing your credit score.
One of the biggest determining factors in the initial approval of the loan and all associated fees, rates, and repayment terms is your business credit score. With business owners often juggling several business credit cards at once, it can be hard for them to always know their exact credit score and determining factors.
However, you can always obtain a copy of your credit report from several credit bureaus. Study the five C’s of credit to better prepare yourself for approval.
2. Failure to explain what the loan is for.
When applying for a business loan—or any loan, in fact—the lender will want to know exactly how you plan to use the money. To meet lending guidelines of the Small Business Administration, for example, it is necessary for the lender to determine how this loan will benefit you including what your needs are and how this loan will meet those needs.
3. Making major financial changes prior to submitting your application.
Lenders want to be able to see that your business is stable, both in how you do business and who you do it with.
Just as you do not want to open and close several credit cards prior to applying for a personal loan, you do not want to make significant financial changes to your ongoing business structure before applying for a business loan.
Depending on the changes you are looking to make, you might also accidentally, negatively impact your credit score—further lowering your chances of approval.
4. Failure to provide adequate collateral.
To protect themselves against a default in payment, traditional lenders require some form of collateral to be pledged as security for the faulty payment. For example, a property you own could be used as collateral. Therefore, adequate collateral is typically a requirement when obtaining a business loan.
In some cases, pledging collateral might be optional, but offering collateral does greatly increase your chances of being approved for the financing you want.
5. Lack of a concrete business plan.
If you want your lender to take you seriously, listen up…
When applying for a personal loan, simply providing pay stubs and W-2’s is typically enough to ensure the lender of you recurring income. However, with a business, you have to demonstrate how the entire business will continue to operate and make money.
A concrete business plan is essential to show the lender your goals, intentions of reaching them, supporting data, and your past and current financials. Your business plan helps convince the lender they should invest in your business.
Author Bio: Annabelle Short is a financial consultant and writer at Content Blossom. She splits her time between London and Los Angeles. Annabelle has worked with many companies providing guidance and advice on finance related topics. Moreover, Annabelle has experience in leading and managing different project teams. Annabelle is a mother of two, and in her free time she likes to sew and make crafts.