If you’ve been dreaming of starting a business and want to make that dream a reality, you need to explore your options for capital.
Applying for a small business loan can feel like a daunting process and you may not know why you were rejected. Each lender has different criteria and to increase your chances of getting a lender to approve you for financing, you need to ensure that your loan application is complete and free from glaring errors.
Here are the Top 10 Mistakes that small business owners make on their loan applications, leading to rejections :
1. Your loan package is incomplete. Don’t rush through your application. Make sure every document requested is in the package and all requested information is provided. Ask the lender for clarification if necessary.
2. You aren’t sure what the terms of the loan are because you rushed through the application. Because of the sudden need for capital and wanting to expedite the process, you may breeze through or ignore the terms of the loan and wind up applying for a loan in which you will not be qualified for and/or has unfavorable terms.
3. You don’t know what your credit rating is. While most lenders will run your credit after you consent to it, many small business loan applications will ask for your credit rating. You need to have this information beforehand instead of guessing what it is.
4. Major changes were made to your business while in the middle of waiting for an approval. If you decided that now is the time to involve your significant other as a business partner or your accountant recommends that you change your company structure, you need to hold off on these major changes until after the loan process is complete or take care of them well before applying.
5. Failure to define what you need the loan for. Is the loan meant for a necessary investment like new equipment, or a nonessential like new furniture? If you have a continually hard time with operating expenses, it can also be hard to justify a loan.
6. Lack of a business plan. Not all loans will require this, but even if a business plan isn’t required it’s prudent to have one if this is your first time applying for a small business loan or it’s for startup purposes.
7. Your financials are outdated. You need the absolute latest financial business and personal documents requested like tax returns, bank statements, etc.
8. Applying too late. Many business owners make the mistake of waiting until money gets too tight before applying for a loan. Apply when your cash flow is healthier.
9. You haven’t demonstrated you’ve invested your own money. Why would a lender give you a small business loan if you don’t believe in your business enough to put in your own funds?
10. Only submitting applications to the most convenient lenders. Only 36% of small business owners seek loans compared to other capital sources. This is partly out of convenience and how direly the funds are needed, and a major mistake is only considering the most convenient lenders who may not offer the best terms.