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| Before you apply for a small business loan, stop and consider these problems that could cost you the loan. Credit: Stop sign image via Shutterstock |
Getting a small business loan is a lot like dating: There are a few things that may improve your chances of success — paying the bill, showing up on time — but your primary focus should be to avoid any serious missteps.
Here are 10 things that can trip you up when applying for a loan for your small business, and a few tips on how to avoid these stumbling blocks.
A dark past
Most people have a few skeletons in their closets, but when it comes to applying for a small business loan, your tainted history may be a nonstarter.
Credit reports are one tool lenders use to determine a borrower's credibility. If your credit report shows a lack of past diligence in paying back your debts, you might be rejected when applying for a loan.
Paul Steck, president of the international franchise restaurant Saladworks, has worked with hundreds of small business franchisees, many of whom have bad personal credit as a result of illness, divorce or other extenuating circumstances.
"Sometimes, very good people, for reasons beyond their control, have credit issues," Steck said. "And, unfortunately, that's a real barrier to entry in the world of small business."
People with bad credit should consider nontraditional financing options — which tend to place less emphasis on credit scores — before giving up on getting a loan.
Empty pockets
An inability (or unwillingness) to pay your credit card bills certainly won't impress lenders, but the thing that will really send them running in the other direction is a lack of cash. Insufficient cash flow is a flaw that even most alternative lenders can't afford to overlook.
Cash flow — a measure of how much cash you have on hand to pay back a loan — is usually the first thing lenders look at when gauging the health of your business. Therefore, it's also the first thing business owners should look at when determining if they can afford a loan.
"Really thinking through that cash-flow equation is like preventative medicine for your business," said Jay DesMarteau, a small business financing expert with TD Bank. "You can either wait until [your business] gets sick, or you can do things to prevent it from getting sick."
One of the preventative measures that DesMarteau recommended is to calculate cash flow at least quarterly. If business owners take that step, they may be able to optimize their cash flow before approaching potential lenders.
No plans for the future
A careless attitude may help you attract certain types of people, but it certainly won't help you woo lenders. Having a plan and sticking to it is much more attractive than spontaneity in the finance world.
"Banks require that business owners have an organized, detailed and quantitative business plan in order to move forward with the loan process," said David Goldin, CEO and founder of AmeriMerchant, an alternative small business lender.
"However, it is common for owners of very small businesses to not have a very formal business plan or any plan at all, for that matter," Goldin told Business News Daily via email.
Though Goldin admitted that a formal business plan isn't a necessity when applying for a loan with many alternative lenders, he recommended that business owners at least forecast their future earnings before applying for a loan. Such a measure will show lenders whether your business is profitable enough to pay back a requested loan.
Being hopelessly romantic
Love is blind, and those in love with their own business dreams are the blindest of all. While it's great to have big plans for the future, small business lenders will want you to be realistic — and not at all short-sighted — about your plans for growing your business.
"Small businesses often make this mistake: They overanticipate the revenue that they're going to get," DesMarteau said. "If it's a Hail Mary pass that revenue is going to be there, it's too much of a bet [for lenders]."
Having financial projections is one way to prove to lenders that your plans for using a loan are well thought out. You should also be prepared to grow your business in stages instead of all at once. This will minimize the guesswork inherent in financial projections and give lenders a better sense of whether your business will have the cash it needs to pay back a loan.
Disorganization
Being disheveled is never sexy — not when looking for a date, and certainly not when applying for a loan. When it comes to approaching potential lenders, business owners should have their act together. That means having all the paperwork you'll need for your loan application on hand.
"One of the things that can be a problem when applying for a loan is if [business owners] don't have the documentation that the bank will require — back tax returns, those sorts of things — as they begin their dance with the lender," Steck said.
There are plenty of resources that business owners can refer to when putting together their loan applications. The Small Business Administration, for example, provides a highly detailed loan application checklist for borrowers. Using these resources can decrease your likelihood of coming across as disorganized or unprepared.
Being too picky
When looking for a partner, many people have a certain "type," but this sort of profiling won't cut it when it comes to looking for a loan. One of the realities of the post-recession world is that business owners have to keep an open mind when looking for funding.
Not only are traditional loans hard to get in today's economic climate, but they're also not necessarily the best option for every small business. And those with bad credit or other credibility flaws will want to be particularly open to the idea of alternative financing, as it might be the only option available to them.
"A bank loan isn't for everyone, and many alternative lending solutions are available," Goldin said. "Alternative lenders have more relaxed requirements, and a business will often need only a credit score of 500 or above to secure funding."
Fear of rejection
If your ego is easily bruised, you may want to toughen up before applying for a loan. Small business owners can expect to be rejected by lenders at least once before receiving the funding they need.
"It's normal for business owners to have their first application get rejected," Goldin said. "If anything, a rejection will alert an owner to the issues surrounding his or her business so they can make the changes necessary and move forward with a new application."
While Goldin admitted that rejection can be tough, he encouraged borrowers to be persistent when applying for loans.
Not having a pickup line
Every suave single knows how to deploy a good pickup line. Prospective business borrowers should also have a few words prepared to break the ice with lenders.
"When I talk to lenders, almost universally, their biggest single complaint is that small business owners aren't able to articulate very well how they're going to use the capital that they're looking for, how they're going to make repayment and what impact they think [the loan] is going to have," said Ty Kiisel, marketing director at Lendio, an online platform that connects small business owners with potential lenders.
Your pitch to lenders doesn't need to be eloquent, just straightforward, Kiisel told Business News Daily. Above all else, he said, small business loan applicants should try to answer the following questions:
- Can you pay back the loan?
- Will you pay back the loan?
- What are you going to do if you can't pay back the loan?
Biting off more than you can chew
Just because you're a small business owner doesn't necessarily mean you're a small business financing expert. But guess what? Lenders don't expect you to be. When it comes to making financial decisions for your business, lenders want to see that you've sought advice from knowledgeable advisers.
"If you use an accountant and you use your banker, they can focus on whatever they make money at doing," DesMarteau said. "If you're a dentist, it's better that you know how to clean people's teeth than be a financial wizard."
Apathy
You wouldn't approach a potential love interest and say, "Hi, I'm totally average, and having a relationship with me may or may not be in your best interest." So don't go that route when it comes to seeking funding for your small business.
Too many business owners approach lenders with an apathetic attitude, Steck said. In other words, they simply don't demonstrate why they, rather than someone else, would be a good candidate for a loan.
"You have to exude a passion," said Steck. "I'm going to do this, and I'm going to be the best in the whole wide world. You have to go into it with that sort of mentality, and a lot of presumed business owners don't do that."
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