Securing the right financing can help small business owners grow their businesses, hire new talent, or stay afloat through a period of slow business. You can improve your chances of getting approved for a business loan or line of credit by researching your lender and their requirements beforehand, as well as staying on top of your paperwork. Here are some common mistakes to avoid when you apply for a business loan or other financing.
Not creating a sound business plan
A business plan helps persuade lenders that your company is organized, sustainable, and worth an investment. A good business plan includes details like an executive summary that provides an overview of your business, a description of products and services, an operational plan, a market analysis, and an explanation of how you intend to use the funds you borrow.
A poorly constructed business plan creates the impression that you're unprepared and not experienced enough to use the funds properly. Business owners must not only create a strong business plan but also be prepared to answer questions that lenders may have.
Not checking your credit report
Both your personal and business credit scores play a role in determining the success of your business loan application. Good credit not only improves your odds of approval but also provides access to better rates and terms. However, applying without ensuring your credit meets the lender’s standards may mean your request for financing is denied. Prioritize your credit with the following steps:
• Research your lender's credit requirements.
• Check your personal credit report to ensure there's no negative information that may hurt your odds.
• If you have a business credit profile, check your credit report and score to see if they align with the eligibility criteria.
• If you haven't established business credit, consider applying for a business credit card or line of credit.
If your credit isn’t what it should be, work to improve it before submitting a loan application. Alternatively, you can seek out lenders who specialize in providing loans to low-credit borrowers.
Leaving paperwork to the last minute
Not submitting the proper financial information is a common reason why lenders reject loan applications. It's a good idea to start assembling the paperwork for your application well in advance. Here are some of the documents you'll need:
• Proof of identity
• Pay stubs
• Business license
• Business plan
• Bank statements
• Tax returns
• Trade references
Requirements may vary by lender and the type of loan you seek, so don’t hesitate to reach out to potential lenders and ask about the paperwork you’ll need. Gather your financial paperwork in advance so you’re not left scrambling if your lender requests additional documentation.
Doing your due diligence on loan applications and communicating any doubts or queries to lenders can make the process smoother. Applying for a business loan, especially your first, can be nerve-wracking. Don't hesitate to get help from a financial advisor, mentor, or experienced and trusted friend.
