4 Mistakes to Avoid When You Apply for a Small Business Loan
The loan rejection rate in the United States of America is 20%, which means one out of every five businesses fails to acquire business loans. So what contributes to such a high rejection rate? Years of research and observation have shown that there are some universal mistakes that are made by many business owners when they apply for a loan.
Seeing that the requirements set by banks and other financial institutes are so strict, these mistakes prove to be detrimental to the chances of attaining a small business loan successfully. The reason banks are so tough on giving out loans to small businesses can be traced back a decade to the financial crisis of 2008, which rocked not just the US economy, but the economies all around the world.
Since then banks ensure that all the loans they give out are properly vetted. So if you make mistakes during the loan application process, you are quite likely to be denied a loan. Let us take a look at four of the most common mistakes made by applicants when applying for a small business loan and what can be done to avoid them.
Neglecting Business Details: When you ask for someone’s money, the first and perhaps only concern the lender might have is how and when they will get paid back. It is no different when it comes to small business loans. Any lender needs to be persuaded to give you their money and assured that they will be paid back in full, on time and there is no better way to do that than to convey your capability to pay back through fine business details. Mostly, business owners neglect to fully mention their business details in loan applications. The operative in a word in the last sentence is “fully”. Though almost everyone may mention a part of everything to the lender, it may not be enough to persuade them. That is why business details of any kind need to be mentioned in full. Business details refer to:
- A complete business plan that includes the nature of the business, objective or primary goals, competitor analysis, market landscape analysis, financial statements and their analysis and the strengths and weaknesses of the business.
- Credit scores
- Time spent in business
- Annual Revenue Generation
- Repayment capacity
Applying for Too Many Loans: As mentioned above, the credit score is one of the details that you need to be mention to the lender in your business details. A credit score is given a considerable amount of importance because it tells the lenders how likely it is that the borrower will pay them back. A low credit score means that the lenders may not get their money back because the borrower is bad at giving payments back at the time and has many overdrafts. But these aren’t the only things that hurt your credit score. Applying for too many loans is a common mistake for most business owners because, in their view, this maximizes their chance of getting at least one business loan. But when you apply for a loan, it is important that the lender works on a hard credit pull. This may cause dents to your credit score substantially. So it is essential to apply for the loan you need and want to get. Usually, a credit score of 640+ out of 850 is sufficient to satisfy alternative lenders. If you apply through online lending platforms such as Orumfy, the terms and conditions are much more transparent and the process is easy and efficient.
Not Applying for the Right Loan: Applying for the right type of loan is as important as applying for the right amount of loan. Applying for the right loan means to apply for the loan that is suited to your business industry and can cater to your particular business needs. There are loan packages that are designed for borrowers but opting for the wrong package will undoubtedly lead to rejection. For example, you cannot ask for a short-term loan of 3 to 18 months if you are planning to finance fixed assets such as machinery or building. This shows the lender that you are not sure of your own business needs and thus leads to loan applications being rejected. Knowing your own business details helps you decide how to choose the right business loan.
Not Giving the Loan Application on Time: Not only does this give a bad image to the lenders, showing carelessness and incompetence but it also reduces your chances to get approved due to the intense competition of a large number of businesses asking for loans. Another risk of submitting late loan applications is that you may fall prey to high-interest rates or unfavourable repayment terms due to the stress of time.
These were just some of the major mistakes made by business owners when applying for small business loans. Make sure to avoid committing these mistakes to maximize your chances of getting a small business loan.
