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 when applying for a small business loan 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, or 401k 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.
4 Things You Shouldn’t Do On Your Own When Applying for a Small Business Loan
If you want to raise capital from banks or lenders for your small business, it would be wise to know the things you should avoid doing (to get the results you want). Attempting to navigate the small business financing industry on your own with no guidance will prove to be a daunting and confusing task. If you have any plans on applying for a small business loan, there are certain things that you should not do on your own, rather consult with an expert. Below I provide you with a list of four things you should not do on your own if you plan on applying for a small business loan. Doing these four things improperly will hurt your chances of being able to obtain the financing you need to grow your small business.
- Developing Your Business Plan – Some lenders will require you to submit a full business plan (with marketing plan and financial projections) along with your loan application. Developing a well-thought out and well-researched business plan is critical to having lenders take you and your business endeavors seriously and for them to consider you for approval. Working with an expert who has experience helping small business owners develop their business plan to apply for financing is critical if you want to get your loan approved. Doing it on your own runs you the risk of leaving something out that an expert would have otherwise known to include. Most of the business plan I’ve seen that were written without expert help were lacking critical information that lenders want to know. Don’t be the person to leave something out, seek expert help to be sure you’ve got it done right.
- Registering Your Business & Obtain a Tax ID – Consulting with a legal expert to register your business is critical. When I started my first business, I used a service company to register my business. It turned out to be a big mistake because they forgot to file my business as an S-Corp at the Federal level and when I tried to file my corporate taxes as an S-Corp, I wasn’t allowed. The time to file as an S-Corp had already passed. To avoid situations like this, consult with a business lawyer who specializes in registering new businesses.
- Filing Your Own Business Taxes – Filing taxes is very important as a small business owner because there are plethora of things that you can legally write-off to lower your tax bill. It’s wise to keep a Legal CPA on your payroll at all times as a small business owner so you always file your taxes accurately (so you can get the most savings) and on time (so you can avoid late fees and penalties). Attempting to file your own business taxes could results in errors that potentially increase your tax bill.
- Applying for a Small Business Loan – And finally, if you plan on applying for a small business loan, I suggest that you seek expert help from a financial advisor or loan broker. Financial advisors and loan brokers often have built relationships with a network of banks and lenders (both traditional and alternatives). They have access to funding sources and information on various programs that you may not be privy too. It’s always wise to seek the help of an expert before you commit to completing any type of financial transaction, including applying for small business loans. Experts like the advisors at LenCred will work with you to determine the best type of funding for you based on your unique situation and help you get that funding. They will also guide you to the best lenders that offer the best rates and the lenders that are lending to people like you. Seeking expert help to apply for a small business loan will save you time and money.