Top 15 Small Business Loan Mistakes You Can Make

small business loan mistakes

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.

Broken Pencil Background Photo via Shutterstock

Joshua Sophy Joshua Sophy is the Editor for Small Business Trends and the Head of Content Partnerships. A journalist with 20 years of experience in traditional and online media, he is a member of the Society of Professional Journalists. He founded his own local newspaper, the Pottsville Free Press, covering his hometown.

10 Reactions
  1. I agree. I think that you should make use of what you have and then borrow when you really have the means to pay for it.

  2. While some of these mistakes might seem a little basic, you would be surprised what people going into business (or even business veterans, for that matter) forget or never even consider. It should be an understood given for lenders to ask for detailed plans for the loan being requested, and if they don’t, it may clue you in on the quality of the firm itself. Thanks for sharing this.

  3. I can imagine that mistakes like these happen without even thinking about it. That’s why it’s important to stay on top of your finances, the direction of your business, and yourself. Thanks for sharing this and reminding me that even the littlest mistakes will add up when you least expect it.

  4. “6. Missing Payments”

    Positive data credit bureaus report payment history, and missed payments show up as a trend very quickly. This “trend” will cast doubt in credit manager / lending managers minds as to whether any (potential) loan repayment could be sustained.

    “7. Letting Personal Credit Scores Drop”

    Again, as with missed payments, your credit score can very quickly be negatively impacted by missed payments.

    So the whole cycle is compounding.

    It is far better to focus on meeting payments / repayments, than trying to resuscitate a credit score further down the track.

  5. Amazing and effective post. This is really very helpful for me. Can I take payday loan with bad credit? Bad credit really very important to take loan?

  6. Hii
    Great article to get detailed information about loan schemes for small businesses.It also tells us various rules that are involved ,when we are apply for a particular loan.

    Thanks,for sharing this valuable information with us.

  7. I liked when you talked about using local lender when looking for a loan. It makes sense that doing this can help you get a great deal and be able to get the best payment options. I can see how anyone looking into this would want to make sure they consult with several companies and compare their services before they choose one.

  8. Awesome Post Very Knowledgeable and Helpful for me.
    Thanks For it!

  9. Amazing Post Very Knowledgeable and Helpful for me.
    Thanks For it!