No matter how big your dreams are or how perfectly crafted your business plan is, there’s a high chance that you’re going to need a business loan. Not having a business loan can make even the first step towards opening your doors very difficult. However, aspiring entrepreneurs will often tend to make the same mistakes when going into their local banks. As the saying goes, if you fail to plan, you plan to fail. Therefore the following list includes eight of the most common mistakes made by business leaders when attempting to obtain a business loan.
1. A Poor Credit Score
One of the most common errors that business leaders make when seeking a business loan is not taking their personal credit score into consideration. Many sources will state that a bank will look at only the financial state of the company. This is true, but only when the business has had a history. When it’s a new company, the bank then relies on the owner’s personal credit score. So, if you know that you have a history of not paying back your personal debts in time, then you may not receive the decision you were hoping for.
2. Not Having Enough Cash Flow
When a bank begins to review your loan request, the first thing they’re going to ask is how are you going to pay back the loan. This is especially true for a business that has now proved that it can generate positive cash flow. Although their’s nothing you can do about that, you can demonstrate to your lender that you have a preventive plan in place. Much like doctors who diagnose and provide medicine to patients in order to prevent them from getting any sicker, so should you have a preventive plan for when your business gets sick. This demonstrates to your bank that you’re ready to tackle anything that comes your way, and thus they should feel confident about your ability to pay.
3. Lack of Plan
You may have the next big product, but if you’re not ready with a business plan, then you might have to wait a while until you present your product to the world. The reality is that having a comprehensive business plan as you walk into your lender’s office can drastically reduce your chances of coming out with a loan. Therefore, it is highly recommended to take the time to develop one that contains the marketing side of your business and the financial part as well/.
4. You’ve Simply Applied too Much
It can seem like a great way to get an offer, but applying to multiple lenders at the same time may not be the wisest of moves. When you send out applications to multiple entities, you are then sending out alarms to the various credit bureau in the country. Lenders will then see this and question why you’re applying so much. In other cases, they might just straight up refuse your request.
5. You Don’t Have Proper Documentation
Lenders understand that asking for a loan is a complex and frustrating process, but it’s not a difficult one. Lenders will help walk you through the process, but you need to meet them halfway, and that all starts by having the proper documentation. Some of the documents you are going to be asked for include proof of collateral and extensive financial records such as your personal credit score, bank statements, and loan history, to name a few. When you make your lender’s life difficult, they are much more likely to throw your application into the rejection bin.
6. Not Utilizing Experts
When lenders begin the interview process, they are often going to ask if you’ve consulted with experts regarding your business claims. This is asked for two reasons. One is that they want to know that a third-party who will not benefit from the business deal is placing their approval on your business plan. The second involves simply not believing the information you present them with. They want to know that you’ve done your homework enough to prove your claims. Now, who are the type of “experts” that you need on your business plan? These will include accountants, attornies, and business leaders who’ve worked within your industry.
7. Not Taking the Time to Look Around
It may sound strange, but lenders are often fighting for you instead of the opposite. This is because is not only the bank making money but also the person approving the loan. Therefore it is recommended to always shop around first before you settle on one particular lender. Failure to shop around can have you end up receiving a high-interest rate and a lower loan amount than you actually need. You should always begin with your local area first as these are the people who know your community the best. They are much more likely to understand your business approach within your city. However, if you cannot come to an agreement, you can always expand to larger lenders and even those found online.
8. Not Showing Why You’re Different
Much of the process regarding obtaining a business loan can be rather tedious and essentially non-eventful. This can quickly lead your lender to see you as any other person asking for a business plan. Although it’s not going to break your chances of obtaining a loan, it’s not going to help you either. This is why it is so important to demonstrate to your lender why you’re the best in your industry and why they shouldn’t worry about being paid back. The more you prove to your lender that you’re passionate about what you’re selling, the better the chances that they’re going to see this and approve your loan.
Obtaining a business loan is, no doubt, one of the most daunting parts of starting your own company but it’s incredibly necessary to succeed. Therefore, it is important to utilize the information posted above to ensure that you’re not leaving the bank with a rejection letter.