In our work at LenCred, we work with a lot of small business owners who’ve struck out in trying to get a bank loan. There are some basic mistakes owners make in their loan application process that often doom their chances of getting the money they need to grow their business.
Here are the five most common mistakes we see:
1. Not understanding all your options. There are only two basic ways to raise money for your business — taking on debt or giving away equity. If you’re on the debt side trying to get a loan or small business line of credit, you need to know all the options available to make the right decision for your business. For instance, do you know about equipment financing, factor lending, purchase-order financing, unsecured business loans, merchant financing, or401k ROBS transactions? These are a few of the different types of debt solutions for small-business owners. If you don’t know what they all are, you can’t know which type would be the best fit for your business.
2. Not identifying the right lender for your business’ needs. Not every bank will give you a business loan without collateral. Do you know which banks have a larger appetite for your type of loan — say, financing for a multi-unit apartment building? If your credit isn’t great and you’re financing a $50,000 piece of construction equipment, do you know the non-bank lenders that might want those deals? Matching the business loan to the right lender is how these deals get done. Most small-business owners simply go to the local banks they know, or national banks they may have heard are lending, without an understanding of which lender might be most interested in their particular loan type.
3. Not dealing with the right person at the right lender. There are many reasons most banks only approve 10 percent or less of the business-loan applications they receive. One reason is the person you contact at the bank isn’t experienced at putting together a loan package. They don’t know how to talk to a loan underwriter when there’s a problem or question about your application. We have had many instances where owners had their application denied by multiple banks. Then we take them right back to one of the same banks they tried — but give the deal to a more qualified banker, who understands how to package the deal and present it to the underwriter — and get their loan done.
4. Not knowing your lender’s credit requirements. Do you know what kind of credit score your bank is looking for? Many banks will automatically turn down a small business loan application if the business doesn’t meet their minimum FICO score requirements. Sometimes you can find out a bank’s requirements ahead of time, but other times you won’t know unless you’ve done previous loan deals with the same banker. Some lenders also have credit criteria that determine if they will do a deal without collateral. You need to know your credit inside and out to know where you might be able to match up your loan with an amenable lender.
5. Not keeping your business and personal credit separate. If your business credit and personal credit get mixed up together you can hurt your FICO score, increase your debt-to-income ratio, miss out on potential tax credits, and miss opportunities to build up your business credit. When small business loans aren’t done right, they can impact your personal credit rating.
Have you had trouble getting business credit, or a small business loan recently? Leave a comment and let us know what happened.