Wouldn’t it be nice if there was a bank that handed out money the same way people hand free candy during Halloween? Unfortunately, it doesn’t work that way in the real world. In order to qualify for a loan, you need to convince the lender that you can pay the money back—with interest.
As a small business owner, how do you convince small business lenders that you can do that? You can start by avoiding these five common business loan application mistakes.
Mistake No. 1: Not providing detailed financial records
Lenders value transparency. You must prove you can repay the loan and sustain your operations.
Within a good business plan, most of this information should be included. As the SBA notes, a good “business plan should include a complete set of projected financial statements, including profit and loss, cash flow and a balance sheet.”
Don’t leave this financial information out on your loan application, even if you don’t need to write a business plan. After looking at the numbers, you may be worried your company isn’t doing well enough. You’re not alone. Insufficient earnings and cash flow are the main reason banks don’t approve business loans.
Fortunately, there are solutions if income is a problem. Jay DesMarteau, Head of Regional Commercial Specialty Segments at TD Bank, advises that you “work toward lowering expenses or finding ways to grow revenue before applying for a loan.”
Mistake No. 2: Not focusing on your business credit score
Most folks know their personal credit scores, and most entrepreneurs understand that it plays a role in getting a business loan. But not enough business owners pay attention to their business credit score.
In fact, 72% of small business owners don’t know their business credit score. That’s alarming, considering it has a big impact on your ability to get a loan.
So, focus on your business credit score. Use your employer identification number to look up your score with Dun & Bradstreet, Experian, and Equifax. Take steps to improve your standing by reducing debt, paying bills on time, and having suppliers and vendors report positive history (this can be done with Dun & Bradstreet).
Mistake No. 3: Lack of collateral
According to a study from Pepperdine University, a lack of adequate collateral is a primary reason why banks deny loans to small businesses. Anyone applying for a small business loan should be thinking about what can serve as collateral.
What collateral does is assure the lender you have a second source of repayment if your business doesn’t generate enough cash flow. There are many different types of collateral a lender may accept, such as real property, equipment, and other assets. A lien is another option for lenders.
If you have a collateral crisis, there are other options if you can’t get a traditional loan (though they may be more expensive). For example, with an equipment loan, the equipment serves as collateral. With a merchant cash advance, a percentage of future sales are used for repayment.
Mistake No. 4: Not proving your value
Lending is a risky business. According to the Bureau of Labor Statistics, only 30% of businesses last more than 10 years. Because of this, lenders are careful with their cash.
But there are many ways to demonstrate the value of your company. Here are two other common options that will work for any business:
- A business plan: This allows lenders to examine your company’s current financial health and growth potential. You may think that writing a business plan can seem like a daunting task, but there are resources to help you. For instance, Bplans, a free resource for entrepreneurs, offers templates, guides, and tips to craft business plans.
- A pitch: If you’re concerned a business plan won’t get you the attention you need, consider a quick presentation. Guy Kawasaki states “a pitch should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points,” and it should describe the problem, your solution, the market, and your business.
Mistake No. 5: Not properly explaining the use of funds
John Rampton, an entrepreneur and investor, writes that lenders want to “make sure that loan will be used to grow your business so that you can pay them back.” Unfortunately, Rampton notes, many small business owners fail to do this.
Obviously, you’re not going to use the loan for something absurd, like a party bus (unless you’re running a party bus business). You’re going to use it for legit purposes, such as purchasing new equipment or expanding to other markets. Detail this in your loan application.
Keep in mind that many loans have restrictions as to how you can use the cash. Research this before applying.
You’re too smart to be making these mistakes
By taking the time to make sure your loan application shines, you’re doing your business justice. Do everything you can to greatly increase the chance of approval.
If you get denied, then it’s probably because of factors outside your present control, like not enough time or business or not having proper collateral. If that’s the case, look at alternative financing options, such as online lenders, business credit cards, and personal loans for business.