Access to business loans is critical for our country's small business community. This capital is central in funding startup costs, expansion ... and sometimes survival. The most recent data suggests that just under half of small businesses turn to commercial banks for business loans and other funding options for their small business.
If you're looking for assistance in getting your company off the ground, beware of these most common business loan mistakes:
1. Believing a Business Loan Is Your Only Option
There isn't just one type of business loan you can get, and banks aren't the only organizations that can lend to you. Many small business owners mistakenly believe that banks and credit unions are their only possible resources for getting money to start a business. So, they download an application and start putting together the information without checking out other options. In addition to small business loans, you could turn to friends and family, look into venture capital funding, and consider funding your effort with your own savings. Additionally, industry grants might be an option. Speak with your local Small Business Development Center to learn what local options you might have for funding.
2. No Attention to Detail
This is the largest mistake that small business owners make when applying for a business loan. There are a few common trends that lenders see when business owners lack attention to detail during the application process:
- Being vague in discussing their business vision. Not planning appropriately to include a vast number of details and thorough descriptions of your product, marketing, and operations plans will cost you. Lenders won't understand exactly what your actionable idea is, and therefore will be less likely to grant you the money. To position yourself in the best possible light, don't just provide the basic information requested of you in the business loan application -- provide your completed business plan outlines, your marketing and sales strategies, your market research, and your short and long-term goals.
- Not clearly indicating how the money will be used. Lenders want to know exactly what your financial needs are, and how the money they loan you will help you meet your objectives and goals.
- Not demonstrating how the business will make money. At the heart of your business loan transaction is the understanding that, after they loan you money, you will repay it. You must be able to show your current financial data and projections, which help lenders understand how you plan to profit and ultimately reach your financial goals.
When you request an application for a business loan, you should also get a list of any desired supporting documentation, so that you prepare all possible information that will help you secure funding.
3. Not Reading the Fine Print
You need to know exactly what you're getting into, and for how long. If you're granted a loan through a financial organization, it's not sufficient to have the representative give you a quick overview of what the contract says. Take the contract home, comb through the terms thoroughly, ask every question that comes to mind, and get your lawyer to review if you are unsure of the terms. You could position yourself for long-term challenges if you jump the gun and anxiously sign a loan with terms that are unfavorable.
4. Dismissing Your Own Credit Rating
Your personal credit rating has a significant impact on whether or not you're likely to secure a business loan. As a new small business owner, you must be able to prove that you're capable of maintaining a favorable credit score. Any lender you work with will pull a credit report on you as part of the application process. Prepare for this by pulling your own credit score from all three major consumer credit rating agencies so that you can verify the information for accuracy and dispute any necessary blemishes.
What mistakes did you make during the business loan process that you learned from?
Photo source: commercial-loan-advice.com