Most small businesses will require extra capital at some point. While the loan application process is usually straightforward, several common mistakes can slow things down or even result in denial. Use the checklist below to avoid errors or loan rejection by doing these ten things.
1. Not Knowing Credit Scores
Your credit score is a crucial piece of information that every business owner should have before applying for funding. The score determines how much money to lend and where to set the interest rate. Scores and reports should be obtained from all three credit bureaus to see exactly where things stand.
2. Not Understanding Loan Terms
Business owners are often in a hurry to get money. They may agree to a loan without fully understanding its terms, which can negatively impact the long run. It’s best practice to read each item and ask questions about anything that seems unclear.
3. Not Locking In A Rate
Interest rates fluctuate often. Take stock of the rate movement, so you know the right time to lock in a variable rate. In some cases, the opposite may happen, and the rate will increase, making the loan more expensive.
4. Not Providing a Reason for a Loan
The expansion of a small business is always good, but be clear about the specific details about how you will use the money. Communicating well about how you will use your funding is a vital part of the process. The owner must provide a reason for the loan and how it will help to achieve goals.
5. Not Being Stable
One aspect lenders consider before providing a loan is stability. A business should not make significant structural or personnel changes before or during the application process.
6. Not Shopping Around
While there are many lenders to choose from, business owners often go to the bank when they need money. Looking into other options, such as a credit union, may result in better interest rates and terms. Besides which, the Small Business Administration offers loan programs to assist small businesses.
7. Not Having Financial Documentation
A merchant should never begin a loan application without current financials and documentation.
8. Not Having Equity
Just like a house requires a down payment, a business project should have equity to ensure the loan application process goes smoothly. Lenders are more likely to take a chance on a company where the owner is already invested.
9. Not Having Collateral
Business conditions can be unpredictable. It is best to provide collateral, which is essential in case of default.
10. Not Having a Plan
When starting a small business, there needs to be a plan that outlines the operation and generates a profit. Lenders require this information to understand needs and goals and how the owner intends to achieve them.
The plan should be submitted along with financials during the loan application process.
Running a small business can be a satisfying and profitable experience. When extra funding is needed, avoiding the common mistakes outlined above will ensure a faster loan approval for an expansion and avoid loan rejection.