Getting approved for a small-business loan can be challenging especially if you don’t know what you’re doing. Even a seemingly minor mistake, or lack of preparation, can get you declined. To help increase your chances of loan approval, these experts shared the most common small-business loan application mistakes that can get your loan denied.
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Here are the top 25 mistakes you should avoid when applying for a business loan:
1. Mixing Personal & Business Finances
Jay DesMarteau, Head of Commercial Specialty Segments, TD Bank
To properly track revenue streams for a small business, it’s imperative to keep any personal finances completely separate from those of the business. A 2017 TD Bank survey found that 27% of small business owners use the same checking account for personal and business finances, which can cause major issues for the business and could have negative implications on a loan application because it is more difficult to determine business income and expenses versus personal income and expenses. Mixing finances can also cause small business owners to accidentally overlook key insights about their business, or make it much too easy to borrow money from the business to pay for personal needs.
2. Not Having a Clear Plan for the Funding
Bernardo Martinez, U.S. Managing Director, Funding Circle
Lenders need to understand why you’re looking for funds and how you intend to use the money. This means you need to clearly enumerate what you need the funds for. Working capital is rarely a sufficient explanation for an underwriter. Applicants can position themselves much better by being able to break down exactly what they need and what they need it for. You should also explain how the loan will help the business and how it fits in with your overall plans for growth.
3. Rushing Through the Loan Application
Matthew Gillman, CEO, SMB Compass
Filling out a loan application is not fun. However, rushing through a loan application and making mistakes only prolongs the process. If you don’t know the answer to a question, leave it blank and come back to it. A lender is going to make an initial decision based on the information you provide. If the information is inaccurate, then you’re going to receive an inaccurate proposal.
Also, share the negatives first and don’t wait until you’re further along the process. Addressing the challenges upfront will get you an accurate answer much quicker. Avoid a “slow no” at all costs. Don’t hesitate to ask questions. A lender or loan advisor is there to guide you through the process.
4. Failing to Keep the 5 Cs of Credit in Mind
Iskender Eguz, Head of Small Business Lending, Capital One
As you prepare to apply for a business loan, you should keep in mind the 5 Cs of credit, a common lending framework: Capacity, Capital, Collateral, Conditions, and Character. The underlying business or the business plan should have the Capacity to generate enough cash flow to pay back its debt obligations, while absorbing unexpected expenses or changing Conditions in the economy or industry. The Character, or who the small business owner is, is critical. Finally, how much personal investment or money you are putting in your business (Capital), and whether you would offer anything as security for the loan (Collateral) shows your commitment to the business and can influence ability to get approved.
5. Not Identifying a Loan Purpose
Ty Kiisel, Editor, OnDeck
This is the first question you should be asking yourself—be specific. It will help you determine the type of financing that suits the business need, the loan amount, and which lender is likely to have what you’re looking for. What’s more, most lenders appreciate a business owner who can clearly articulate the reason why they are borrowing. Is it a short-term need you’re trying to fill, like purchasing quick-turnaround inventory? Or is a longer-term need like financing a new location across town? Although they are both legitimate small business reasons for borrowing, they are best suited to different types of small business loans.
6. Focusing on the Headline Cost
Robin Abrams, Finance Director, Trade Finance Global
One mistake when applying for a small business loan is focusing too much on the headline cost. Many banks quote a price that actually turns out to be very different to the real economic value of a facility. It does not take into account the ability to increase or decrease facility limits, non-utilization rates, flexibility, speed of processing, administration, issuing fees, and covenants. Many people opt for a seemingly low cost facility, only to find that it is unworkable and prevents the company from realizing its potential.
7. Not Approaching the Loan as a Full Banking Relationship Opportunity
Walt Parker, VP – Business Development Officer, First Bank
Bankers are jealous professionals. The role of a banker is to provide full financial guidance and support for their clients. If the proposal for a small business loan seems like a transaction, then the banker is going to be less likely to feel passionate about approving the credit. If the small business owner were to approach the banker as if they are in the market for a banking relationship and to get overall advice on what the actual loan need could be, then the possibility of full loan approval is a lot more likely.
Consider applying for a line of credit and build a long-term business relationship with your bank.
8. Failure to Accurately Forecast Cash Flow Needs
Brent Reinhard, Chief Marketing Officer, Chase for Business
When applying for a business loan, it’s important to create a detailed business plan that accounts for where each dollar is coming from. Engage a good accountant early on to ensure you have enough funds to cover your monthly payments and other business expenses in the long term.
If you need more cash for your working capital, check our article about the best working capital loans available.
9. Not Choosing the Right Lender
Ben Gold, President, QuickBridge Funding
There’s a variety of lenders willing to lend to small businesses. It’s important that you do your research and make sure you choose the right lender for your specific business needs. Use lenders’ web pages and customer review sites to make sure they’re reputable and have your company’s best interest in mind.
10. Not Being Truthful When Presenting
Stuart Blake, Vice President of Sales & Customer Service, BlueVine
When it comes to a loan presentation, it’s important to be able to highlight the strengths of your business. However, resist the temptation of presenting a less than truthful image of your company when applying for financing. Eventually, the truth will get exposed and it could hurt your future efforts to secure financing.
Read our article and learn how to apply for SBA loan.
11. Not Updating Online Profiles
Sarah Hancock, Chief Editor, BestCompany.com
Business owners can increase their approval odds by reviewing and optimizing their online profile. Many lenders will perform due diligence during the approval process, which includes reviewing the information available about your company online.
Before applying for a loan, look over your company’s website and make sure that it’s up to date and looks professional. Review your company’s presence on social media sites such as LinkedIn, Facebook, and Twitter, and make any necessary changes or deletions. It’s also a good idea to check for any reviews that your company may have received on third-party sites; try to respond to them and remediate any potential issues if possible.
12. Having a High Credit Utilization Ratio
Brock Blake, CEO & Founder, Lendio
One of the most common reasons for loan rejection is credit utilization—the ratio of your current credit balances to credit limits. This is slightly different than your debt-to-income ratio, which divides your monthly debt obligations by your monthly gross income. Both measurements reflect how much additional debt you can afford to take on, so the lower these ratios are, the better chance you have of being approved for a loan.
13. Not Understanding the Different Types of Loans
Fareed Kaisani, Business Restructuring & Bankruptcy Attorney, Munsch Hardt Kopf & Harr, P.C.
Some business owners think they are getting a loan when they’re actually selling or factoring receivables, which some companies disguise as loans and absolutely gouge business owners when they are already desperate. A classic example of this type of arrangement is when the lending company gives the business money upfront and then pays itself back through the business credit card transactions or bank sweeps. They don’t always call it interest, but the business owner may end up paying outrageous interest over the course of the loan, which is typically paid back over a short period of time.
14. Failing to Consider Other Types of Financing
Marwan Forzley, CEO, Veem
Nowadays, small businesses have many options for financing other than the traditional business loans. There are companies that provide small businesses with a line of credit of up to $200,000 or more, while others offer invoice factoring (which means you can get an advance on your outstanding invoices). There are types of loans that can get you approved within a day. If you fail to consider these other options, you can miss out on several financing opportunities.
15. Being Too Evasive, Passive, or Conciliatory
Daniel Feiman, Managing Director, Build It Backwards
It’s important to tell the lender everything about the loan and your business, including how much you want, what you plan to do with the funds, how and when you plan to pay it back, and what you’ll do if you can’t pay it back. Also, make sure to include all the necessary information about your business—the principals, your supported projections, and your historical financial statements and tax returns.
16. Failing to Understand Eligibility Requirements
Jacob Dayan, CEO, Community Tax
If you’re looking to obtain a business loan, you need to ensure that you know the bank’s eligibility requirements. For instance, you should have a good personal credit score, because the bank will use it to determine if you’ll qualify. Other factors that are used to determine your eligibility are your business’ monthly revenue, length of time in business, industry your business is in, and current amount of debt.
17. Not Choosing the Right Business Structure
Melissa Tepeyac, Associate Director of Digital Marketing, National Paralegal College
The small business’ structure affects how much an owner pays in taxes, the paperwork he files, how he raises capital to grow the business, and most importantly, his personal liability. The simplest small business structure is a sole proprietorship. It is the least expensive to establish, and the owner makes all decisions and keeps all profits. However, the biggest disadvantage is that legally, the business owner and the business are one. If the sole proprietorship files for bankruptcy, is sued, or fails to pay for the loan, the owner’s personal assets can be seized to satisfy these liabilities. Choose your business structure carefully and wisely first before applying for any kind of business debt.
18. Applying for a Loan Before You’re Ready
Wade Rasmussen, President, Amerifund, Inc.
A common issue with a small business loan application is that many business owners apply for a loan before they’re fully ready to do so. The process of getting approved for a loan involves several factors beyond the guarantor’s FICO score. You need to take the time to file as a business entity and prepare your tax filings and other documents to help expedite the process of your loan application.
19. Being Disorganized
Sean Snider, Director, University of La Verne Small Business Development Center
Being disorganized is one of the most common mistakes when applying for a small business loan. Most lenders and banks require a list of documents. If you are not organized, it will be difficult for you to obtain these requirements in a timely fashion. Also, there is a chance that you will miss something, which can lead to a delay in your small business loan application process.
20. Not Having All Necessary Information on Hand
Sam Schapiro, CEO & Founder, Fundomate
Not having a list of the lender’s requirements wastes valuable time on both ends and makes the funding process seem cumbersome. In addition, because small business owners don’t do their homework of knowing where their business stands financially, they often have unrealistic expectations in terms of what they qualify for. For example, most short-term business lenders have a cap on how much they can offer in funding, which is closely tied to the business’ monthly gross revenue.
21. Misrepresenting Time in Business
Cory Damm, Vice President, LeaseQ
One common mistake when applying for a business loan is misrepresenting the information on “time in business.” Some prospective borrowers often equate their years of experience working for someone else in an industry as “time in business.” However, what lenders are really asking for is how long has the borrowing entity been formed or incorporated.
22. Failing to Read & Understand the Terms & Conditions Before Signing
Joel Klein, Founder & CEO, IMBC Marketing
Often, the borrower doesn’t thoroughly read and understand the loan’s terms and conditions before signing the contract. Some lenders can manipulate you into signing loans that could end up getting you in more financial trouble in the future. It is always a smart idea to take the time to read and understand what you’re getting into. Spend enough time to make as many inquiries as possible about the loan you’re applying for.
23. Not Pledging Collateral
Caitlyn Rose, Small Business Consultant & Finance Editor, LendGenius
Applying for a loan when you don’t have an asset to be used as collateral can make it difficult for you to get qualified. Collateral is a business or personal asset used as a security for a loan. Some lenders will require that you provide some type of collateral. Pledging collateral mitigates the risk assumed by the lender, increasing your chance of getting approved for a loan.
To learn more, read our article on how to get an unsecured business loan for your startup.
24. Turning in Erroneous or Do-It-Yourself Tax Returns
Bryan Doxford, Chief Lending Officer, Excelsior Growth Fund
Do not rely on online software to prepare your taxes, especially if you’re applying for a small business loan or seeking funding from serious investors. It’s best to work with a professional CPA with knowledge regarding what lenders want to see. It’s absolutely critical that you represent a reliable and accurate picture of the company’s financial position via your tax returns when working with lenders, and many business owners make serious mistakes when taking a DIY approach.
25. Not Being Consistent With Your Information
Gerri Detweiler, Education Director, NAV
Not being consistent with the information that you declare when filling out a small business loan application can lead to a delay in the process, or worse, a denial. Information such as the date you started your business, your business location, and financials are very important to lenders. This information can also help them locate your business credit history from commercial credit bureaus.
When applying for a small business loan, it’s very important to come prepared. One small mistake can lead to a denial of your loan application. Make sure to spend the time doing your research first before talking to your lender. Also, remember to avoid the 25 small business loan application mistakes listed above.