Mistakes to avoid when applying for a business loan
Find out what to look out for to ensure you get the loan that's right for your business.
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A loan can be a valuable source of funding for businesses of all sizes, but finding the right loan can be difficult. Getting your financing right is vital to the success of your business, so it pays to know what you'll need to do when applying for a loan.
Use our guide to learn the common mistakes to avoid at each stage of the loan process to help get your application approved and find the business loan that best suits your needs.
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Mistakes to avoid when looking for a business loan
If you've decided to get a loan to help fund your business, it's important to understand all your options before you commit to a certain product. Keep the following mistakes in mind when finding a business loan:
- Mistake #1: Not comparing loans
When looking at getting a business loan, many business owners may simply go with their existing bank and fail to compare the range of loan options available from other lenders. A business loan is an expensive undertaking, so it's important to research as many loan products as possible to find the one that makes financial sense for your business.
- Mistake #2: Ignoring fees and comparison rates
When comparing business loans, you should always be aware of any fees or charges you'll need to pay as part of the loan. While a certain loan product may have a low interest rate, it may also come with a number of hidden fees that may greatly increase the overall cost of the loan. When comparing different business loans, you should take note of the comparison rate as it factors in any additional fees or charges to show you the true cost of a loan.
- Mistake #3: Not understanding your other options
As well as secured and unsecured business loans, there are a range of other finance options that may be better suited to your business. These include:
Mistakes to avoid once you've picked a business loan
Once you've compared your options and found the loan that's right for your business, there are still a couple of things to consider before you apply. Avoid the following mistakes to make sure you're getting the right deal:
- Mistake #4: Choosing the wrong loan amount
Before choosing a loan, you should have a clear idea about what you need the loan for and the amount you need to borrow. If you don't borrow enough, you may run into cash flow issues and need to apply for another loan, which may not be approved. If you borrow too much, you may find yourself making costly interest repayments on capital that you aren't using.
- Mistake #5: Not having a plan for paying off the loan
Once you've found a loan, you should develop a plan for how you'll pay it off. You'll need to factor the costs of the loan, including interest payments, into your business's cash flow budget. Failing to repay a business loan may result in you losing your property (if you've used it as collateral on a secured loan) or leave you personally liable for the debt, so you should always have a clear and realistic plan for repaying your loan before you commit.
Mistakes to avoid when applying for a business loan
Applying for a business loan can be a demanding and time-consuming process, so you want to give yourself the best chance of being approved. You'll need to provide detailed financial information as part of your application and will also need to meet strict lending requirements to be eligible for a loan.
The following mistakes may cause your application to be delayed or even rejected outright:
- Mistake #6: Not knowing your credit score
Lenders will check your credit score as part of their approval process. A bad credit rating is likely to get your application rejected, so you should always check your credit score and take steps to improve it before applying for a loan.
- Mistake #7: Not having a business plan
You'll need to demonstrate how your business operates and how it will make money. If you don't provide a detailed business plan and financial information, as well as what you need the loan for, the lender will almost certainly reject your application. This is especially important for new or growing businesses.
- Mistake #8: Not having your financial details up-to-date
If the financial details you provide are incomplete, inconsistent or out-of-date, the lender will likely ask you to resupply them or may reject your application outright.
- Mistake #9: Making major changes to your company
Lenders want to see that your business is stable and a reliable investment, so large changes to the business are likely to be seen as red flags. This applies to personnel changes, financial changes and changes to your business models or operations.
Other mistakes to avoid
- Not having a clear loan purpose. If you don't have a specific idea for how you'll use the funds, you may end up getting a loan that is unsuited to your business and end up paying more than you need. Furthermore, if you don't have a clearly defined plan for the loan, lenders will be hesitant to lend it to you, even if your financials show you can repay it. Have cash flow projections that incorporate the loan you're applying for and show how you'll use and repay it.
- Being impatient. Each lender will have a different approval process for business loans and the first lender you approach may not necessarily close the deal for you. You're entitled to ask your lender how long the process will take, but keep in mind it may take longer than you first thought. You should understand that the entire process can take days or weeks, so if you need immediate funding, you should consider short-term business loans.
- Not applying for finance when you need it. It can be difficult to plan your business cash flow needs and projections, but having a firm grasp of your financial situation will help you understand when you may need to take out a loan. You don't want to be stuck in a position where you desperately need funding but have to go through the time-consuming application process because you haven't planned for the future.
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