Common Mistakes When Applying for a Small Business Loan

June 6, 2016

Common Mistakes When Applying for a Business Loan


If you run a small business, sooner or later you are going to need an infusion of capital. When you are ready to take the plunge and seek funding, you don’t want to make a mistake right out of the gate that could complicate your chances of getting a loan later. Things like not having a clear plan for your loan, not borrowing the right amount, and taking too long to make a decision can make an otherwise exciting time in the lifecycle of your business frustrating. Here are the most common mistakes we see small business owners make, and how to avoid them.


Not Knowing Why You Want a Loan


Seems like a simple enough step. Yet every year, we encounter applicants who have only a vague notion of what they will spend the loan proceeds on. They may understand that they need to increase sales and profits, but haven’t really planned or priced out the specific actions they need to take.


Fortunately, if you find yourself in this situation, it can easily be fixed. Create a spreadsheet that lists your business goals, what actions are needed to achieve them, and how much money they will cost. Your goals should connect back to your overall business plan so not only do you have a clearer idea of price, but you are also clear on the loan’s purpose in the “big picture.” You also need to do a cost benefit analysis to calculate how much your business will benefit by achieving the goals you’ve listed. Your cost benefit analysis doesn’t have to reach military precision, just a reasonable estimate of how you think events will pan out.


If you’re unsure of your plans, then seek outside confirmation before you start applying for loans. There are plenty of resources available from the Small Business Administration to your local chamber of commerce. When you’re satisfied with your plan, commit to it and apply for the loan.


Borrowing Too Little


Another problem applicants run into is over-optimism, meaning they have calculated the business’ borrowing needs based on a best-case scenario but missed the secondary effects of the loan. For example, you might rightly conclude that if you could borrow to increase your inventory, you would easily increase your sales volume. That might be true, but will you also need to increase store space or hire more staff? Not borrowing enough to cover secondary effects like space and staffing can mean, at best, returning for an additional loan, and at worst, failing to execute your plan and potentially jeopardizing your business because you ran out of money.


Borrowing Too Much


It feels good to see money in your business account, and you might think, hey – I might as well borrow extra “just in case.” There is nothing wrong with building contingencies based on a worst-case scenario into your plans so you can make sure to still deploy your borrowings effectively. However, good contingency planning is specific and focused. What doesn’t make sense is to borrow way more than you need just to make yourself feel more secure, or worse, to mask fundamental problems with your business.


The risks are that you will waste money needlessly on interest payments and that you’ll fritter away the extra money on business whims rather than relying on solid planning. Then, when you suddenly need extra funds for a real reason, your access to credit might be limited due to the amount you already owe.


Don’t Dawdle


Take as much time as you need to formulate your borrowing plans, but once you’ve worked out what you need and have applied for a loan, don’t waste time deciding whether you should go forward or not. It takes time for a lender to process a loan application. Some might be able to give you a next day funding, but some might take far longer to pull your credit history, check out your current financials, and so forth. If you wait more than 30 days to make a decision, lenders will have to pull your credit history again. While IOU Financial does a “soft” pull that doesn’t affect your credit score, some other lenders do hard pulls that can damage your score. Furthermore, by needlessly procrastinating, you risk higher interest rates, and the problems that motivated the original loan request might suddenly get worse, perhaps making it harder to get the original amount approved.


If you have a good business and a solid plan for your loan, IOU Financial will be happy to quickly see if you qualify for one of our flexible business loans at a competitive interest rate. Do your homework, be clear on the amount you need to borrow, then contact us and we’ll get you the money you need in 24 to 48 hours.

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