Bank financing is one of the most common solutions when it comes to boosting a business: whether it is to start up, grow or deal with supplier payments at delicate times. Through this operation, a financial institution grants certain money to a company in exchange for interest. The return of the capital will be made little by little, although in previously agreed terms.
Starting your own business has never been an easy thing to do as it comes with a number of difficulties and challenges. All business owners have their ups and downs, some of them even have to find ways to avoid bankruptcy of the business.
One of the strategies that can help get your business back on its feet is to get a small business loan. However, many small business owners make mistakes that decrease their chances of getting a loan.
8 most common mistakes people make when applying for a business loan
1. They are not prepared to obtain a loan
Some small business owners simply don’t prepare all the details before applying for a loan. There are certain things that need to be put in order before asking lenders for a loan. This process can take several months, so it’s best to start preparing now if you know you need a small business loan.
Lenders don’t like errors in accounting records. If you are one of those business owners who keep paper ledgers, it may be time to switch to an accounting software program that can automate your financial tasks like invoicing and easily generate financial reports.
3. Tax return
Legitimate lenders (you just want to deal with them) expect businesses to have filed proper returns and paid taxes. Lenders who don’t care about this are unlikely to be able to offer a loan with reasonable rates and terms.
4. Preparation for loan interviews
Finally, you must prepare for the loan interview. It’s important to make a good impression on your lender with your organizational skills, proactivity, and in-depth knowledge of your business operations and finances.
Be prepared to answer all the questions a lender might ask about your business history, and you’ll improve your chances of getting a loan.
In addition, you must prepare your personal history, resume, income tax returns, financial and bank statements, as well as legal documents such as articles of incorporation.
5. They have a low or no credit score
Just as your personal credit score indicates your creditworthiness, your business credit score tells the lender whether and on what terms to give you a loan. A low credit score or no credit score are challenges many businesses face, and this can prevent you from getting a loan.
In the event that your business credit score is bad, you should start working on improving your credit score as soon as possible. Make all your payments on time, make sure you spend under your credit limit, and keep all your credit accounts open.
According to the Small Business American Dream Gap Report, up to 45% of business owners surveyed were unaware they had a business credit score. Do not be one of them.
Every business has several different credit scores, but the most common is the FICO credit score. You can obtain a FICO credit report at one of three credit bureaus: Experian, Equifax, and TransUnion.
6. They have bad cash flow.
Businesses with cash flow problems may have serious difficulties obtaining a loan. If a business doesn’t make money, lenders consider it risky. How are you going to repay the loan if it is not profitable?
You can improve your cash flow by speedy billing, resolving late fee issues, having an emergency fund, and reducing unnecessary spending.
What’s even worse, some companies with good cash flow may be turned away. This usually happens when a company is not established or when it is new. Young companies and startups face this challenge all the time.
However, start-ups can apply for a loan from the SBA (Small Business Administration), which is guaranteed by the United States government. SBA loans are made by most of the largest banks.
7. They have no guarantee
Even if you meet all of the above criteria, lenders will be reluctant to give you a loan if you don’t have collateral. They are generally unwilling to risk lending money to companies without a promise of repayment.
What this means is that you have to offer physical property that they can take in case the loan is not repaid. To make sure you’re eligible for a small business loan, create a list of everything you can put up as collateral.
This can be any business or even a personal asset, especially if your business has no real estate or equipment to offer. In some cases, it may be necessary to offer your home as collateral. However, in this case, you need to be extremely careful and not deal with just any lender. In such a situation, you need to find legitimate small business loans.
Alternatively, you can try to find a lender that does not require collateral. They will still put a lien on the general assets of your business, whether or not they add up to the value of the loan.
8. They don’t have a solid business plan.
As a small business or any other type of business, you need to have a solid business plan. Without it, lenders will reject you outright.
Your business plan should show that you have done extensive research, know your customers and prospects, have a clear mission statement with achievable goals, as well as a calculated estimate of sales and profit projections.
Having a clear strategy for the future will show lenders that you are serious about your business. This will make you a better risk for lenders and give your company credibility.
Advantages and disadvantages of requesting a bank loan
Some of Advantages:
- Immediate financing: you can get rid of debts or acquire a good for the business quickly and easily.
- Adapted to your needs: the bank will normally assess your financial situation and, based on this, you can define the repayment terms and the interest rate.
- Ability to forecast payments thanks to periodic installments: your treasury does not have to be affected since you will know, with enough time, when you will have to face payments.
- Up-to-date knowledge of the debt: bank credits allow you to know, at all times, what your debt is and how much you have left to repay.
Some of the disadvantages:
- Need for a guarantee or guarantee of payment: sometimes, the bank may request a guarantee in order to obtain the credit. In case of non-payment, you could lose it.
- Commissions: in some cases, in addition to interest, there are commissions associated with the credit that increase its cost.
- Long-term debt: when applying for a loan we are acquiring a debt with the bank that we will drag until we have finished repaying all the capital.
- Procedures and paperwork: the previous procedures require providing a lot of information, so that the bank can evaluate your case, and this part of the process can sometimes take longer than expected.
It is not easy at all to meet all the criteria that small business lenders may present to you. However, it is necessary to take all the steps we mentioned above to increase your chances of being approved for a loan.
If you know you need a loan, start preparing now, as these strategies can take time to produce results. You need to think ahead – at least two or three months before applying for a loan.