I often hear business owners, and individuals alike, say they have no idea why they are unable to get approved for a loan. They make plenty of money, use their credit cards responsibly, and never make late payments. In this article, we enlighten you on top mistakes in applying for a small business working capital loan.
However, they are often oblivious to all the little details that go into the decision-making process of lending.
If you’re looking for advice on applying for a business loan, you are probably in one of these two situations:
- You have applied for a business loan and were rejected.
- You are planning to apply for a business loan, but you have no idea how to ensure approval.
Common mistakes in applying for a small business working capital loan
1. Forgetting to read the lender’s requirements
Before applying, you should research different lenders and review their prerequisites. If you don’t meet their standards, they won’t be able to provide you with a business loan.
Filling out an application for a product that you don’t qualify for will be a waste of your time. Instead, find a lender whose qualifications you meet.
If you are unable to find one, consider working on raising your credit score, meeting their time-in-business requirement, or reaching whatever guidelines that you currently do not meet.
Don’t lose hope – with hard work you’ll be able to get your business up to a lender’s criteria!
2. Not having updated financial records
Another top mistake in applying for a small business working capital loan is that many small business owners make when seeking a loan from any financial institution is not investing more time to work on their financials.
Unfortunately, all the banks need this information to determine how stable your business is before risking the money in it.
If you aim to expand your business, any financial institution would want to know if the business they are funding can repay the loan or can sustain itself soon.
Any financial information regarding your business should be clear and tangible.
If you want to increase chances for business approvals, present honest balance sheets, cash flow statements, and any other relevant documents requested.
3. Not having a clear plan for the funding
Lenders need to understand why you’re looking for funds and how you intend to use the money. This means you need to enumerate what you need the funds for.
Working capital is rarely a sufficient explanation for an underwriter.
You should also explain how the loan will help the business and how it fits in with your overall plans for growth.
4. Failing to keep the 5 Cs of credit in mind
As you prepare to apply for a business loan, you should keep in mind the 5 Cs of credit, a common lending framework: Capacity, Capital, Collateral, Conditions, and Character.
The underlying business or the business plan should have the capacity to generate enough cash flow to pay back its debt obligations while absorbing unexpected expenses or changing Conditions in the economy or industry.
The character, or who the small business owner is, is critical. Finally, how much personal investment or money you are putting in your business (Capital), and whether you would offer anything as security for the loan (Collateral) shows your commitment to the business and can influence the ability to get approved.
5. Not choosing the right lender, a top mistake in applying for a small business working capital loan
There’s a variety of lenders willing to lend to small businesses.
You must do your research and make sure you choose the right lender for your specific business needs.
Use lenders’ web pages and customer review sites to make sure they’re reputable and have your company’s best interest in mind.
Also Read: How to reduce credit risk in your business
6. Applying for the wrong type of loan
Most of the times small business loan applications get turned down by banks not because the idea was vague but because of a mismatch in the applications.
The demand you have as a business has to coincide with what you apply for. For instance, a business owner is not supposed to apply for a short-term loan to finance their vehicle.
This is unrealistic and the bank won’t have any other option other than to reject your application.
It is also good to note that every type of loan comes in a unique package that has a different interest rate, the length of the repayment period, and so on.
This means that if you apply for the wrong type of loan, it could end up costing you even more on the interest rate.
Therefore, it is always good that you do background research on the type of loan available which suits your needs before making any application to reduce the chances of rejection.
7. Lie on your application, a top mistake in applying for a small business working capital loan
Understandably, you want additional financing for your business. Still, you need to be entirely honest about your loan application.
A high-quality small business lender will fact-check your application and will be able to debunk any lies that they find.
If you start off being dishonest with a lender, they will likely not be willing to work with you.
Remember, they do not want to put themselves at risk by working with a business that either doesn’t fit their requirements or isn’t forthcoming about their financial situation.
Also Read: how to get a small business loan
8. Not reading and understanding the terms of service well
Another common mistake many businesses make is not reading and understanding the company’s terms of the contract. This is one of the top mistakes in applying for a small business working capital loan.
This might cost you a big deal as a business. When looking for a working capital loan, it is always advisable to check and counter check the terms of the contract to calculate all the expenses that you undergo as a business and the profit you will remain with.
This means that you need to ensure that the option you pick as a business does not interfere with your profit margins.
9. Forgetting about existing debt, a top mistake in applying for a small business working capital loan
Whether it is debt from a previous loan or other outstanding debt, this could affect your ability to repay a loan. This is another top mistake in applying for a small business working capital loan.
Trying to pay back a lender while also satisfying your other financial obligations could present many challenges.
If you have too many debts to repay, you may even have trouble running your business.
Although you want additional working capital for your business, it might not be beneficial if the repayment process proves to be too strenuous.
If this is the case, try to pay back your debts, and then apply for a business loan once you are in better financial standing.
10. Mismanagement of finances
This goes without saying but since many businesses make this mistake, it is worth repeating over and over again to ensure this top mistake in applying for a small business working capital loan is curbed.
When working with any loan, a business should ensure that it not only invest in long-term returns but also in short-term options that can provide liquid capital.
This might be required to finance daily needs such as running expense, paying utility bills, its suppliers, or workers’ wages.
Lack of liquid capital also might lead the business to lack the required cash to pay its loan and this could lead to insolvency.