Starting your own business has never been an easy thing to do, as it brings a number of difficulties and challenges. All business owners have their ups and downs, some of them even having to find ways to avoid business bankruptcy.
One of the strategies that can help you get your business on its feet again is to get a small business loan. However, a lot of small business owners make mistakes that decrease their chances of getting a loan.
These are the 8 most common mistakes people make when applying for a business loan.
1. They don’t prepare to get a loan
A number of small business owners simply fail to prepare all the details before applying for a loan. There are certain things to get in order before actually asking lenders for a loan. This process can take several months, so you’d better start the preparation now if you know you need a small business loan.
Lenders don’t like errors in bookkeeping files. If you are one of those business owners who keep paper ledgers, it may be the time to switch to a bookkeeping software program that can automate your financial tasks like invoicing and easily generate financial reports.
3. Filing taxes
Legitimate lenders (you only want to deal with them) expect businesses to have filed appropriate returns and paid taxes. Those lenders who don’t care about this probably can’t offer you a loan on reasonable rates and terms.
4. Preparing for loan interviews
Finally, you need to prepare for your loan interview. It is important to make a good impression on your lender with your organizational skills, pro-activity, and thorough knowledge of your business’s financial operation and financials.
Be ready to answer all the questions that a lender might ask you about your business history and you will improve your chances to get a loan.
In addition, you should prepare your personal background, resume, income tax returns, financial and bank statements, as well as legal documents such as articles of incorporation.
5. They Have Low or No Credit Score
Just like your personal credit score indicates your creditworthiness, your business credit score tells a lender whether they should give you a loan and on what terms. A low credit score or no credit score at all are challenges that a lot of businesses face, and this can prevent you from getting a loan.
In case your business credit score is bad, you need to start working on improving your credit score as soon as possible. Make all your payments on time, make sure you spend less than your credit limit, and keep all of your credit accounts open.
According to the Small Business American Dream Gap Report, as much as 45% of surveyed business owners didn’t know they had a business credit score. Don’t be one of them.
Each business has several different credit scores, but a FICO credit score is the most common. You can get a FICO credit report at one of the three credit bureaus: Experian, Equifax, and TransUnion.
6. They Have Poor Cash Flow
Businesses with cash flow problems can have serious difficulties getting a loan. If a business does not make money, lenders consider it to be risky. How are you going to pay off the loan if you are not profitable?
You can improve your cash flow by prompt invoicing, solving any late fees issues, having an emergency fund, and cutting unnecessary expenses.
What is even worse, some businesses with good cash flow can get rejected. This usually happens when a business is not established or when it is new. Young companies and startups face this challenge all the time.
However, startups can apply for an SBA (Small Business Administration) loan, which is guaranteed by the US government. SBA loans are given by the majority of larger banks.
7. They Don’t Have Collateral
Even if you meet all the criteria mentioned above, lenders will be reluctant to give you a loan if you have no collateral. They are usually not willing to risk lending money to businesses without a promise of reimbursement.
What this means is that you have to offer physical property that they can take in case the loan is not repaid. To ensure that you are eligible for a small business loan, create a list of everything you can put up as collateral.
This can be any business or even personal asset, especially in case your business has no real estate or equipment to offer. In some cases, offering your home as collateral may be necessary. However, in this case, you need to be extremely careful and not deal with just any lenders. In such a situation, you need to find legitimate small business loans.
Alternatively, you can try to find a lender that doesn’t require collateral. Still, they will place a lien on your general business assets, whether they add up to the value of the loan or not.
8. They Don’t Have a Solid Business Plan
As a small or any other kind of business, you need to have a sound business plan. Without it, lenders will outright reject you.
Your business plan should demonstrate that you have conducted thorough research, that you know your customers and potential clients, have a clear mission statement with attainable goals, as well as a calculated estimate of sales and profit projections.
Having a clear strategy for the future will show lenders that you are serious about your business. This will turn you into a better risk for lenders and give your company credibility.
It is far from easy to meet all the criteria that small business lenders may place before you. However, it is necessary to take all the steps we mentioned above in order to increase your chances of getting approved for a loan.
If you know that you need a loan, start preparing now, as these strategies may take time to bring results. You need to think in advance – at least two to three months before applying for a loan.