Small businesses have traditionally had a hard time accessing extra capital — i.e. through small business loans — from banks, big and small. And economic realities and forecasts dictate, generally, just how generous these institutions are at any given time.
Still, small businesses aren’t exactly being choked off entirely from getting approved. And the market has been improving for small businesses seeking loans. But in order to get a lender to take a flyer on your small business, it’s best not to make a rookie mistake on your way to getting that loan approval.
Below are some of the top small business loan mistakes you can make.
Don’t Make These Small Business Loan Mistakes
1. Maxing Out Credit Cards
Maxing out your credit limit is a bad idea if you hope to continue to get business financing. Piling up big expenses on your personal or business credit cards only leads to high interest payments.
And not being able to pay back your credit card bills will only serve to damage your personal and business credit score. That’s going to make it very difficult to ever find a real loan.
2. Ignoring Requests from the Lender
Be prepared when seeking extra capital for your business. During the loan application process, your prospective lender may ask you for a lot of information, some of which you may not have at the ready. It’s best to be prepared for any questions your lender might ask and to avoid making them wait too long for your answer.
3. Ignoring the Fine Print
You’re going to need to read the fine print on any loan offer you’re considering. Failing to read the fine print is one of the most common small business loan mistakes, and can prove very costly in the end.
4. Borrowing to Have More Cash on Hand
If you’re serious about acquiring a small business loan, know that this should not be just for the purposes of having a safety net. Having a large sum sitting in the bank could be tempting. Frivolous spending could quickly drain your funds and make any initial goals you had for utilizing that money unattainable.
5. Failing to Shop Around
Apply the same intensity to your small business loan search as you would to searching for the right vendor or the perfect product. Shopping around gives you the opportunity to compare available offers. Who’s offering the most competitive interest rate? Who has the best terms?
There are more lenders available to small businesses these days, and not all are created equal. Failing to shop around is doing your small business a disservice.
6. Missing Payments
Not only will late payments look bad with your lender. They will begin to accrue penalties and fees. Soon, the payments you’ll be making on your loan will start multiplying.
And,of course, failing to make loan payments on time could hamper any prospects of your business gaining access to extra capital in the future.
7. Letting Personal Credit Scores Drop
Getting your small business a loan and maintaining a good business credit score are both certainly important. But don’t let your personal credit score get damaged in the meantime. Using personal money to meet business expenses could damage your personal credit score in the process.
If you’re allowing your personal score to dip while applying for a small business loan, it could hurt your ability to get approved or to getting an ideal loan offer.
8. Not Knowing What You Want
Before you pick up a phone and call a bank or other lender or even set foot in a loan office, know what you want. Do some exhaustive searches on the Web to find what kinds of loans are available to your business
9. Seeking a Loan in an Emergency
Getting approved for a revolving line of credit now could save you from being forced to make a desperate application for a loan in the face of an emergency.
For instance, if your business property is severely damaged in a storm and you’re going to need thousands of dollars to replace the roof, it’s best to have ready access to a line of credit rather than going through the arduous process of applying for a loan — and risk not getting approved — while your business suffers.
A line of credit, approved before any potential disaster or emergency, would enable you to be ready to act immediately when faced with such a situation.
10. Having No Plan for the Money
First of all, the would-be lender is probably going to ask what the purpose of the loan is. And at that time — and definitely before then — you should have a clear answer and a concise plan for the loan money you’re seeking.
If it’s an expansion project, clearly detail the plan and present it to a prospective lender.
The lack of a plan will certainly leave your lender questioning whether to give you the loan at all.
11. Having High Turnover
If lenders investigate the stability of your company at the time you’re applying for a loan, seeing that turnover is high could send up the proverbial red flags.
Indeed, stability within your organization at the time of your application is a key factor to getting approved.
12. Keeping Messy Books
Accounting, especially for the smallest of small businesses, tends to be a task that gets put off too long. This leads to keeping slipshod records riddled with inaccuracies.
It’s hard to go into a bank seeking a loan if you don’t even know the true financial status of your company. If accounting is becoming too much of a chore, check out one of the newer cloud-based accounting apps that integrate with a lot of other tools you may already be using at your company.
If you can’t keep your current funds in order, your lender could have serious doubts about giving you more.
13. Having No End Game
Even if you’ve clearly demonstrated how you plan to spend the extra capital you’re seeking, a lender is going to be more inclined to approve that request if they’re confident the investment is going to a profitable effort.
In your loan application process, be sure to spell out how the loan will benefit your business and improve its financial standing. This will show you’re likely to be able to pay back the money you’re borrowing — and in a timely manner as well.
14. Applying for Another Credit Card
Just as it’s a bad idea to gain funding by putting a big expense on an exiting business credit card, it’s also poor judgment to apply for a second credit card in lieu of getting a loan.
Maxing out a single personal or business credit card to cover large business expenses is bad enough. Getting another card and doing the same will put your business in even more financial difficulty.
15. Ignoring Alternative Lenders
Banks big and small are not the only sources of capital for small businesses these days. There’s a rise in the availability of small business capital from so-called alternative lenders, credit unions, and online lending sources.
There are a growing number of these sources and many target small businesses specifically. Of course, you will want to thoroughly check their reputations and the terms of the loans they are offering before saying yes.
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