Starting or expanding a business often requires securing financing. It can help cover various needs, such as operational expenses, expansion, equipment purchases, office rentals, and employee salaries. Now, while business loans can provide the capital you need, the application process can be daunting. Avoid these common mistakes when applying for a business loan to improve your chances of approval.
Mistake 1: Failing to Research Business Loan Providers
Before filling out any applications, research your lending options. Every business loan provider has its own qualifying criteria, loan products, and rates. Going with the first lending company you find may mean you miss out on more favourable loan terms elsewhere.
Thoroughly research and compare multiple loan providers. Local banks and credit unions are a good place to start. But don't limit yourself to traditional brick-and-mortar institutions. Online institutions and NBFCs also offer quick access to capital through streamlined applications. You must look for lending companies that specialise in your industry or desired business loan type.
Mistake 2: Neglecting Your Personal Credit
Financial institutions review your credit profile in addition to business credit when evaluating a loan application. When applying for a business loan, issues like late payments, collections, and excessive debt burden on your personal report can jeopardise the chances of qualifying.
Aim to maintain a personal credit score over 700 and lower credit utilisation below 30% across all accounts. Check your credit reports from Equifax, Experian, and Transunion for errors that could drag down your score. Pay off personal credit card balances and resolve any late payments. Your personal credit standing affects the loan terms and rates you’ll be offered.
Mistake 3: Not Having Your Paperwork in Order
Going into a business loan application unprepared is a surefire way to get rejected. Before meeting with a lender or filling out an application, assemble these critical documents:
- Financial statements: Have at least three years of financial statements ready, including profit and loss statements, balance sheets, income statements and cash flow statements.
- Business plan: Financial institutions want to see a solid business plan that details your company’s objectives, target market, competitive landscape, marketing plan, and financial projections.
- Personal financial statements: This includes personal tax returns, bank account and investment account statements, credit reports, and information on assets and liabilities.
Having all your paperwork ready to submit will speed up the application process and improve your chances of getting approved.
Mistake 4: Providing Inaccurate Information
Falsifying or exaggerating to improve your chances of getting a business loan almost always backfires. Financial institutions thoroughly fact-check the details submitted in the application when assessing credit risk.
When questionable data surfaces, it taints the application and often leads to outright rejection. Even if approved initially, inaccurate information gets picked up in subsequent audits and can lead to legal repercussions, making applying for business loans a more challenging task in the future.
Mistake 5: Overestimating Projections
It’s smart to be optimistic when pitching your business to financial institutions. But aggressive sales and profit projections can undermine your credibility. When making projections, analyse your current sales data, costs, profit margins, market size, and share. Factor in potential risks and challenges, like a new competitor entering your space. Run projections by your accountant or advisor to ensure they add up.
Present conservative, realistic projections to loan providers. Support higher estimates by outlining your growth strategy and statistical models. Backing up positive predictions shows good planning, not just hoping for the best.
Mistake 6: Accepting Unreasonable Loan Terms
Eagerness to get funding may tempt you to accept loan terms that don't align with your business needs or ability to repay. Variations like longer repayment periods, interest-only payments, and balloon payments can provide short-term relief but cost more long-term.
When assessing loan terms, consider your current cash flow and realistic future projections. Align the repayment schedule with your projected ability to cover payments. Shorter terms often have lower rates, too.
Conclusion
By being aware of the common mistakes while applying for business loans and meticulously checking all boxes, you can optimise your chances and secure funding to drive growth on agreeable terms.
FAQs
1. What documents do I need when applying for a business loan?
Typical documents include 3 years of financial statements, business plan, personal financial statements, tax returns, bank statements, and information on business assets that can be used as collateral. Having all paperwork ready before applying saves time and improves approval odds.
2. How long does the business loan application process take?
It typically takes 1-3 months from application to funding but can vary by the loan provider. Simpler applications for smaller loans can be approved more quickly. Preparing paperwork ahead of time helps speed up the process.
3. How do loan providers assess my ability to repay the loan?
Financial institutions look at your personal credit score, business financials, collateral, projections, and factors like industry outlook. Strong business performance and healthy personal finances help demonstrate repayment ability.
4. Should I apply to multiple loan companies to compare offers?
It's generally not recommended to actually apply with multiple loan providers simultaneously, as each application can negatively impact your credit score. A better approach is to research and compare multiple lending companies first without formally applying. Once you've selected the loan provider that best aligns with your business needs, proceed with a single application.
5. What happens if my business struggles and I can't make loan repayments?
Communicate with the loan provider immediately if you anticipate problems making payments. Many will work with borrowers by extending terms, modifying payments, or restructuring the loan. Defaulting should only be a last resort, as it impacts your business credit standing.
