Banks and other loan providers are far more cautious about lending than they were just 15 years ago. The global credit crisis of 2008 changed the financial outlook considerably, putting more pressure on small businesses to prove they don’t pose significant risks.
As a small business owner, you now have to jump through hoops in order to secure financing the traditional way. Just one error can damage your chances of securing the capital you need to grow your business, setting you back or blocking your growth entirely.
Before you make your next loan application, make sure you’re not making one of these five relatively common mistakes.
1. Providing Incomplete Financial Records
You have to be honest and upfront about your current financial position. Failing to provide complete records might be seen as an attempt to create a false picture of your business’ finances. As well as historical financial records, you’ll be expected to provide projections and estimates. In addition, you will need to explain how you made your calculations.
Go into as much detail as you possibly can, and provide everything you’re asked for by the lender. If you don’t have the time for hours of paperwork, or simply don’t want to provide this level of detail, it might be a good idea to consider fintech lenders that process applications quicker and online. Modern fintech companies make decisions based on a wide array of available business data, beyond the typical criteria of credit scores and assets—using online accounting software and bank account statements, for example.
2. Disregarding Your Business Credit Score
Businesses have their own credit scores, just like consumers do. Unfortunately, most small business owners don’t realize this. They apply for their loan without checking their scores and have their applications needlessly rejected.
In many cases, there are steps business owners can take to increase their credit score—which can drastically increase the chances of a successful application. Use your employer ID number to check your score with the likes of Equifax and Experian before you apply for financing.
3. Underestimating the Time a Loan Application Takes
Small business loans can take up to 90 days to complete—longer in some cases. If your business’s need for funds is urgent, this may be too long to wait. Try to anticipate your needs for financing in advance through careful bookkeeping, accurate forecasting, and sensible planning.
For example, imagine a small business needs to buy an item of machinery to win a new contract. This is a time-sensitive scenario that requires fast action. Waiting three months for a loan application to be approved could see your business miss out on a vital contract. You could, in these circumstances, apply for an equipment loan or a line of credit with an online business lender—and if approved, have the funds for the purchase in your bank account as fast as the next working day.
4. Failing to Demonstrate a Sound Business Plan
According to the Bureau of Labor Statistics, just 30 percent of businesses survive 10 years or more. Banks and lending institutions are acutely aware of this alarming statistic. Traditional lenders typically won’t approve applications unless there is a clear plan for the future in place. That means, if you want to get your loan application approved, having a comprehensive business plan is essential.
Not only that, if you’re applying for funding from a traditional lender, like a major bank, you may need to pitch your business plan concisely and with conviction, in person. We recommend taking the time to practice.
5. Not Providing an Explanation of How You’ll Use the Funds
Traditional lenders want to know exactly where their money is going to be spent. There has to be a valid reason for the expenditure, such as the construction of new business locations or the purchase of new equipment. If you can demonstrate that spending the money now will enable your company to grow in the future, the chances of having your application approved may increase dramatically.
Make sure you have covered all your bases before applying for a business loan. If you’ve avoided the most common pitfalls and mistakes, it might be time to consider some of the faster, more user-friendly, alternative financing options out there. You might find that you can get the funds you need, faster and with less paperwork.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.