Becoming a small business owner begins with a great idea and a capital investment.
1. Having outdated financial records. This common mistake will thwart your best efforts to secure a business loan. A financial institution must have an accurate picture of your current financial circumstances. The lender will use this information to determine how financially stable the business owner is prior to making a loan. If your objective is to use the loan for expansion, they want to see your income and expenses to show that you can and will repay the disbursement. They need quantifiable assurance that your business is sustainable for at least the term of the loan.
All financial data that you supply to the lender must be clear, current and tangible. Outdated information will likely secure a rejection. In addition, any inflated or inaccurately adjusted data will become visible after the lender does its due diligence. If their verification (underwriting) process shows different financial data than what you supplied, you are surely going to be facing rejection.
Be honest with your data and be current. Any questionable item on a loan application will result in delays at best. Perhaps your financial status doesn’t warrant a loan in the amount you want. Still, if you supply accurate data, the lender may offer you a loan for a smaller amount.
To increase the likelihood of acceptance, submit accurate cash flow statements, balance sheets, and other relevant documents.
2. No business plan. Your business plan is your road map to success. It also shows the lender that you have a clear objective in mind and a clear path to achieve that objective. You need a business plan that clearly delineates the steps you will take to operate and grow your business profitably.
You should submit your business plan with your application. Most lenders want a borrower with specific goals and the target market already planned with specific steps to penetrate that market. You need to elaborate on the market gap you product or service will fill. In short, you need to demonstrate to the lender how the capital investment will help you generate more profits.
Conduct thorough research into the elements of your business plan. It shows that you are well educated on what you want and how you will achieve it. In addition, if your plan shows that your business has potential to attract consistent revenue, the lenders will be more apt to quickly disburse funds into your account, since they will be assured that you have sincere potential to pay back the loan without difficulties. A well-researched business plan should address areas such as the target market, objectives of your business and the expected future growth.
3. Applying for an inappropriate type of loan. If you look at a business loan from the lender’s perspective, the loan needs to be appropriate for the type of area as well. Business loans come in many different terms to meet the needs of a variety of businesses, both large and small. These loans cater to the varying needs of small businesses. Therefore, you want to ensure that you are seeking an appropriate loan for your circumstances. Your financial needs should match the type of loan designed to meet those needs.
Lenders could turn down a small business loan application for a variety of reasons, but a common reason falls under vague idea and mismatch of funds to needs. The demands of your business do not relate to what you are applying for. For example, a business owner will typically use a longer-term loan to finance a vehicle to take advantage of amortization regulation. An application for a short term loan will be rejected because the approval department knows the amortization schedules. You will also find that loans come in fixed or adjustable interest rates, varying lengths of maturity and with a wide array of repayment and prepayment options.
If you apply for a loan that is mismatched to your needs, you could lose valuable time and money. Take a little extra time to research the type of loan terms most likely to be approved for your business to reduce the chance of rejection.
4. Failing to commit adequate collateral. Lenders need to protect their bottom lines against a potential default in payment. Many conventional lenders require a pledge of collateral as security for a defaulted loan. For instance, capital invaluable property or real estate may be used as collateral. Be prepared with a list of assets that could be used to secure your loan. Collateral may not be required with all loans, but being prepared helps your chances of approval for the loan you desire.
Being prepared to apply for a loan takes extra research and time. However, a rejection will cost you in time and lost opportunities. Avoid costly mistakes and secure a loan more quickly with a few simple steps.