Acquiring a business loan is no cakewalk. Several entrepreneurs face hurdles in securing business loans because they approach lenders without doing the necessary homework. Banks and financial institutions lend loans to businesses having a good credit rating and a strong growth plan. Applications that lack these qualities and are incomplete are denied by lenders. Hence, in order to secure a business loan, you need to avoid certain common errors in business loan application. Here are 5 business loan application mistakes that must be avoided to secure a business loan.
- Undervaluing Credit Rating
Banks and financial institutions inspect your personal and business credit to check your track record with financial responsibilities. This includes checking your history of credit card payments, billings, mortgages, and credits with suppliers. A low credit rating equals to loan rejection. Most business owners fail to check their personal and business credit ratings before applying for a loan. Hence, in order to secure a business loan, you must ensure a good credit and do the necessary to maintain it. You can also provide credit score copies from recognized credit bureaus as a proof of your credibility.
- Failing to Approach Different Lending Options
In their quest to obtain funds, business owners restrict themselves to one or two known banks. While this approach may work for some, it is best to consider different lending options best suited to your situations. Apart from commercial banks, you can approach other financial institutions such as investment banks, credit union, and others. Business owners also get excited over the first approved loan and sign it without understanding its conditions. This can turn out to be disadvantageous as you may end up with the wrong lender. Take time to shop around for business loans and acquire the best deal available.
- Failure to Provide a Good Business Plan or Collaterals
Bankers and other lenders don’t approve loans that have low chances of getting paid back. Many business owners approach lenders without having a strong business and revenue plan or collaterals in place. A strong and functional business plan demonstrates your future profitability and reduced risk for the lender. Hence, you must provide a detailed future plan or details of collaterals that demonstrate your credibility. Make sure to keep your plan realistic and not exaggerate the revenues.
- Not having Updated Financial Statements and Other Necessary Documents
Approaching lenders without updated financial statements and other necessary documents like licenses and permits can invite rejection. Disorganised financial statements and a pile of debts will not impress the lender. In order to avoid this scenario, review your financial statements quarterly to ensure a good status of your financial management. Additionally, make sure you have the necessary permits and certificates in place before approaching a lender.
- Failing to Read the Terms and Conditions
Many business owners underestimate the value of going through an agreement before signing them. Reading and understanding the terms and conditions of the loan agreement is vital before you sign it. Being unaware of the loan terms might lead you to future problems and pay a high interest rate. Make sure to thoroughly read and understand the entire agreement before signing the dotted line. Don’t be afraid to ask the lenders or take the help of an attorney to ensure you are signing a genuine document.
Avoiding these errors in business loan application allows you to successfully obtain a loan at a good rate. While you may prefer applying for a loan by yourself, it is recommended to hire a business attorney to reduce the risk of common business loan application mistakes.