8 mistakes to avoid when applying for a business loan

Aug 6, 2019 | 5 minutes read | Entrepreneurship

30% of small businesses fail due to running out of money. That’s an intimidating figure for the bootstrapped entrepreneur. And if you want to make a big investment to grow your business in the long-term, it can be difficult to find those funds.

That’s where small business loans come into the picture. The Federal Reserve reports that 40% of U.S. business owners applied for a loan in 2017. That same year, small business lending reached $1.4 trillion.

The money’s out there. It’s up to you to get it.

But when you’re figuring out how to get a small business loan, there are some common mistakes you need to remember. Here are eight errors you can make and disqualify yourself from securing a loan:

1) Inflating income and minimizing expenses

When filling out a loan application, you need to give potential lenders insight into your business finances. This includes cash inflow and outflow. Yet many small businesses misrepresent these numbers in their applications. While you may think that inflating your income and minimizing expenses will make your business look more profitable, this usually works against you.

“Lenders have a vast knowledge of industry and can also review the applicant’s bank account transactions,” says Marsha Kelly, small business blogger and serial entrepreneur at Best4Businesses.com. “If the bank suspects the figures are inflated, it’s a red flag about the owner’s dishonesty and often results in loan refusals.”

In these scenarios, honesty is always the best policy. “Most lenders are likely to overlook a small financial ‘hickey’ or misstep in the past, however no one will tolerate deception,” says Stewart J. Guss, Attorney At Law. “If you’re honest and fully disclose and explain any past issues, you still have a good chance of acquiring your loan.”

He also notes that dishonesty could result in worse than just a loan refusal. “If there are any legal issues down the road, and you have misled or deceived the bank in any way, you may have subjected yourself to potential civil or even criminal liability for fraud,” Guss says.

2) Applying for the wrong loan product

There are so many different types of loans for SMBs — it’s easy to get mixed up. But when you’re applying for a loan, it’s crucial that you submit an application for the right kind of loan.

“Each business loan is designed for different purposes,” says Priyanka Prakash, lending and credit expert at Fundera. “Make sure you know why you’re borrowing money, and apply for a loan product that will help you meet your business goals.”

3) Misunderstanding lender qualification requirements

Prakash also says many SMBs go into the process without fully understanding the requirements for their corresponding loan type.

“Most lenders post basic eligibility requirements on their website,” Prakasha says. “Make sure you meet the minimum required credit score, time in business, and any other lender requirements before applying.” Not only will this increase your chances at approval, but it’ll also prevent unnecessary credit pulls from lenders you’re not eligible for.

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4) Incomplete documentation

Loan applications are lengthy. And when you’ve got a million other things on your to-do list, it can be easy to rush through the paperwork. It’s important that you pay close attention to the required documentation.

“Many business owners fail to include necessary supporting documents with their business loan application,” says Prakash. “Some loans, particularly bank and SBA loans, require a lot of paperwork, including past tax returns, a business plan, and a debt schedule.” Failure to provide could delay or even stop the funding process.

5) Applying with bad or little business and personal credit

Potential lenders will run credit reports not only on your business but also your personal credit — especially for new businesses. “If you have a poor personal credit history, that would be taken into consideration,” says Brian Meiggs, founder of MyMillennialGuide.com.

One survey found that there are tons of misconceptions about credit score:

  • 61% think that income has an impact on credit score
  • 42% believe using your debit card or selecting “credit” while using your debit card builds credit history or helps credit scores
  • 79% think credit scores are listed on copies of your credit reports

And that just scratches the surface. “Even if your small business did poorly during the financial crisis or you’ve had a bankruptcy in the past, you can still get a small business line of credit,” says Meiggs.

As far as your business credit, lenders will look at bank statements and credit reports. “If you’re applying for a line of credit over $100k, you should know the basic financials about your company,” Meiggs says. “Overall, it’s important that your recent statements and credit history are positive.”

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6) Mismatched business information

Attention to detail is a theme here, and this mistake is no different. As silly as it might sound, when business details aren’t EXACTLY the same on every single document, you can run into a serious snafu.

Here are just some of the details to look out for:

  • Business name
  • EIN
  • Business license numbers
  • Address
  • Contact information
  • Website
  • Email address

“Banks aren’t going to stop and consider the myriad ways a business could be listed, and that even goes for using “Limited” vs. “Ltd” at the end of your business name. Banks are looking for perfect matches, likely with matching software,” says Janet Gershen-Siegel of Credit Suite. “If any of these pieces of information don’t match, they’ll be seen as missing, and a bank will deny a business loan.”

Copy and paste can help mitigate these discrepancies, but when one does slip through, it’s important to fix it ASAP. “Many small business owners fail to correct the error and hope that their loan officer won’t notice,” says Dock David Treece, senior financial analyst at FitSmallBusiness.com. “This can mean their loan gets denied, takes longer to get approved, or — perhaps worst of all — gets approved with incorrect or incomplete information.” Knowingly providing false information to a bank can be considered a crime in some cases, he explains.

7) Missing details

Not only do details have to be accurate, but they also need to be thorough. “Potential lenders want to know how you will use the money, down to the minute details,” says Jacob Dayan, CEO and co-founder of Finance Pal and Community Tax. “To approve your business for a loan, they need to know your needs and how this loan will help you cover those needs.”

Many lenders require more than just a business plan — they want to see your growth plans and what exactly the capital is used for, and how that will contribute to your bottom line. “We see small business owners requesting loans without clarity around the specific intention of the loan and a concrete plan to back them up in the request process,” says Jared Weitz, CEO and founder of United Capital Source Inc.

“Having documentation of what you plan to do with the loan, what your business goals are long term and the plans you have to get there will not only help your vision, but also provide the lender with confidence in partnering with you,” Weitz says. “When you apply for your next loan the lenders will be given a deeper understanding and background of your business.”

8) Lack of collateral

Dayan also points out that many small businesses apply for loans without any collateral. This is a miss. “Lenders like to see that you’ll still be able to repay your loan even if your cash flow slows down or stops,” he says.

While you might not think your SMB has any collateral, it can be found in unexpected places. “Collateral can come in many forms: real estate property, inventory, and liens are just a few,” says Dayan. “If you can’t find adequate collateral, there are other options, like an equipment loan.”

Moving forward with your small business loan

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