Business loans are often used to acquire inventory, buy equipment, rent operating space, recruit personnel, and make other essential expenditures when starting a business or growing an existing one. On the other hand, new businesses may find it difficult to get business loans.
It may be tough to expand your business without a business loan, which might stifle its development. Commercial banks and non-banking financial companies (NBFC) licensed by the Federal Reserve provide business loans. It is important to note that obtaining a company loan might be difficult. However, by avoiding a few frequent business loan blunders, you may be able to make the process go more smoothly.
Research shows that 30% of small enterprises fail due to a lack of adequate financing. That’s an alarming number for the self-funded entrepreneur. It might be challenging to come up with the capital you need to make a large investment in your company’s long-term growth. Small enterprises seek business loans to finance their growth.
According to the Federal Reserve, 40% of American company owners sought a loan in 2017. Small company loans totaled $1.4 trillion in the same year.
However, entrepreneurs should be careful when applying for business financing and avoid the following costly mistakes.
1. An Inadequate Business Plan
Many company owners are surprised to learn that they have failed to secure a loan since they did not provide the financial institution with a well-organized set of business concepts or a growth strategy. Before approving a loan, the lender scrutinizes the borrower’s business plan, which should be comprehensive. When financiers can’t prove the loan request’s authenticity, they generate a negative opinion of the prospective borrower and refuse the loan.
A business plan also aids in the communication of long-term objectives and techniques for achieving them. Revenue estimates and what you choose to do differently than your competitors should be included in a business plan as strategies leading to loan repayment.
When you apply for a business loan, lenders will often ask you three essential questions:
• What is the approximate amount of money you will require?
• What is the intended use of the funds?
• What are your plans for paying back the loan?
2. Failure to Submit Current Financial Reports
Borrowers should raise their stakes by providing copies of their audited financial statements, including copies of:
• Balance sheet
• Profit and loss statement
• Cash flow statement
• Corporate tax filings
3. Poor Credit History
One of the instruments used by lenders to assess a borrower’s reliability is credit reports. If your credit report reveals a history of not paying back bills, you can be turned down for a loan. On most occasions, company owners misjudge the consequences of their late payments. Your previous late payment is a crucial factor for financial institutions. They may calculate your company’s risk profile using your previous loan information. To boost your chances of getting accepted for a loan, keep track of your accounts receivable, corporate credit card bills, and payments, and stick to a consistent payback plan.
4. Misunderstanding Lender Requirements
Many small business owners have misconceptions about what the lender requires and how to reach out when it comes to lending. Unfortunately, these misunderstandings can cost a company the ability to secure a loan. For businesses to apply for a loan, they must meet certain requirements that may seem daunting at first. However, some steps can help guide your success in obtaining the necessary qualifications and meeting the lender.
5. Going Through the Process Alone
Lenders require a minimum of one partner. This is someone with financial knowledge and a stake in the company. This individual is a part of the decision-making process and bears some of the risks. They can help you develop creative ideas and talk you out of negative ones.
Lending firms are concerned about the security of their funds once they are disbursed to a company. If only one person appears for the borrowing process, the company will deny it because of the lack of continuity if anything happens to the proprietor. A team demonstrates that the business will continue to run with or without one of its proprietors.
6. Rushing the Paperwork
When applying for a business loan, you will drop off your applications at different lending firms. However, different firms have varying requirements, hence requiring different personal and business documents. Do not rush the process because you could make mistakes that will disqualify you from securing a loan.
With the introduction of computerized underwriting, it has become even more important to thoroughly review and respond to all application queries. If you apply for a loan electronically and the lender uses automated technologies, you may be automatically rejected if you provide inaccurate data or don’t respond correctly to the questions.
Being organized is crucial when dealing with several loan applications and negotiating various lender regulations. As a result, you should keep all of your financial and legal documents in one location where they are organized and accessible.
7. Apathy
It’s easy to forget that the business loan application is an intrinsically emotional process since so much of it is systematic, led by the orderly presentation of tangible facts. Too many company owners fail to show why they are a better fit for a loan than someone else. According to scholars, they approach creditors with apathy.
It would be best if you displayed passion and trust in your endeavor to draw in lenders and make them a believer while building a strong business case for why you should qualify for a loan. To do so, you’ll need to give the lender a convincing story about your company.
8. Failure to Seek Advice from Experts
Whether you have a business idea or are just starting, lenders want to see that you’ve sought guidance from knowledgeable advisors. That way, they know your business has a chance of succeeding.
Obtaining working capital for small businesses is an uphill task for entrepreneurs if they fail to seek expert advice from accountants and finance professionals. Business leaders need to seek help from various professional bodies consisting of people in business or retired business people with a wealth of experience.
Entrepreneurs can source knowledge from business networking groups or even read through the websites of different founders of organizations to learn more about funding. Most websites contain information about the available capital and different ways of preparing for funding.
9. Misrepresentation of Financial Facts
When applying for a loan, you must provide prospective lenders with information about your company’s finances. Cash input and outflow are included. In their applications, however, many small enterprises distort these figures. While you may believe that inflating your revenue and lowering your costs would make your company seem more prosperous, the opposite is mostly the case.
Lenders have extensive industry expertise and may examine the applicant’s bank account activity. If the lender feels the data is exaggerated, that’s a red flag for the owner’s integrity, and loan rejections will follow.
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You still have a decent probability of getting your loan if you’re up-front and completely reveal and clarify any previous concerns. Dishonesty might lead to more serious consequences than merely a loan denial. If there are any legal concerns in the future, and you have deceived or duped the bank, you might be facing civil or perhaps even criminal fraud penalties.
10. Failure to Find More Lenders
It can be alluring to sign up with the first creditor. It’s a mistake, though, to focus just on one loan source without considering alternatives. Take the time to look into several conventional and alternative lenders to see which one is the best match for your company.
A good place to start searching for a business loan is through a financial institution in the town where you want to do business. Start with a local community bank or credit union since they may offer special initiatives for emerging local firms.
The SBA also helps select firms get loans from partner banking institutions by providing government support. If you are having difficulty getting a conventional loan for your company, this might be a good option.
11. Lack of Collateral
When applying for a loan, lenders typically look at your credit score and personal financial statement. If you don’t have collateral, you may be denied because lenders are concerned that you might not be able to repay the loan. If you want to secure a loan and avoid any potential issues with collateral, it is important to find good assets, such as stocks or real estate, that can serve as collateral.
Financial institutions do not offer new businesses unsecured, collateral-free loans. Before applying for credit, be sure you already know what you’ll use as collateral. The quantity of collateral you choose should correspond to the loan amount you’re applying for. Loans with no collateral restrictions may be available to small and medium businesses that have been in operation for three years or longer.
Different Types of Business Funding
You may choose from this list of loan choices, depending on your need.
1. Unsecured Business Loans
The borrower does not need to provide collateral, including real estate, automobiles, equipment, stocks, or other valuable assets. Unsecured business loans are often simpler to get and will have similar interest rates than secured loans available through banks and credit unions. The usual loan amount is between $50,000 and $250,000.
2. SBA Loans
Small business loans are a form of financing that helps small businesses to acquire funds for their operations. The loans are made available by participating lenders, and they vary in size, interest rate, and term. SBA loans can be used for various purposes, including inventory financing, working capital, and refinancing existing debt. Banks or other lending institutions usually provide them, but they can also be obtained from private investors.
Many small businesses find it difficult to access the necessary funding to grow their company because of their lack of capital. To solve this problem, some entrepreneurs have turned to crowdfund platforms like Kickstarter and Indiegogo, where they raise money from people who believe in their idea and want it to succeed.
A $5 million loan is the highest amount you can get from the SBA. Small firms choose SBA loans because the prices and conditions are more favorable than many other choices.
3. Merchant Cash Advances
A merchant cash advance (MCA) is a loan that a business can use to buy inventory, raw materials, and other working capital to keep its operations running smoothly. The loan is repaid out of the company’s income, typically over 12 to 24 months.
It’s a loan backed by your company’s future revenues, which you return with a percentage of credit card sales. It is a quick option to get finance since it does not need collateral, allowing for a faster approval process, but interest rates may be quite high. Retailers and restaurants are the most common users. Payment periods for merchant cash loans range from three to 18 months to repay $5,000 to $500,000.
