THE BLOG
08/27/2015 06:38 pm ET Updated Aug 27, 2016

4 Common Loan Mistakes Small Business Owners Make

If it's time to seek a business loan for your company, you're probably worried about whether or not you can actually make it happen. After all, funds have dried up significantly since 2008 and it's very challenging to secure investment from banks and many other types of lending organizations.

When it comes time to put in applications for a loan, you want to give yourself the best possible chance of success. Whether you're keen to seek a fast capital loan from an alternative lender or want to chat to your local bank, there are ways to make your application more likely to be approved. One of the key tips to getting ahead is to learn from other people's mistakes.

Read on for some of the most common errors that business owners make when trying to secure funding.

Mistake #1: Ignoring Financials

A regular mistake that entrepreneurs make when seeking a loan is not spending time on the company's financials. Banks and other lending organizations need to see up-to-date and comprehensive accounting data in order to determine if a business is secure enough to loan money to. Financial records give lenders a snapshot of the current standing of a business, and are a must for any loan application.

Before you attempt to seek funds, make sure that you possess documents such as profit and loss projections, cash flow statements, balance sheets, income statements and recent tax returns. (You may also need to provide information on your own, personal financial status too). All of this data will help potential lenders to see if the business can actually afford a loan, and if so, to what value.

Mistake #2: Lack of Clarity on Use of Funds

Another area where owners tend to fall down when applying for a loan is not having a clear idea about how they would use funds from a lending institution. Before you even start to seek out a cash injection, make sure you spend time analyzing if your company really does need additional money, and if so, what exactly the funds would be spent on.

Lending organizations want to see that an entrepreneur plans to spend money on the "right things" -- that is, on financing purchases or operations that will impact the business in a positive way and help the company to grow. Show lenders that your reasoning is sound by explaining what additional funds will be used for, and the beneficial reasons behind the spending.

Be aware that lending organizations typically see merit in some of the following plans:

  • To pay for product or software developments that will bring in additional sales long term
  • To purchase quality real estate or finance a needed piece of equipment
  • To cover seasonal sale variances

On the other hand, less favorable ways to spend loan funds are seen as things like paying for fancy office setups, buying non-essential assets or financing ongoing losses.

Mistake #3: Applying Too Late

Many business owners also tend to leave it too late to apply for a loan. Rather than waiting until you are desperate for funds (and therefore need to go with any institution that will loan funds, instead of the one offering the best deal), make sure you give yourself plenty of time to explore options and find the right lender for your circumstances.

Spend time slowly and carefully filling out application information, rather than rushing through the process. This way, you will be much less likely to miss crucial information or make mistakes as you go through the paperwork.

Additional "breathing room" also gives you time to build up relationships with key people at lending institutions you're interested in dealing with. Before you actually ask for anything, take time to get to know the right contacts and to develop a relationship with them. This will make a big difference when it comes time to actually submit your loan applications.

Furthermore, by not being desperate for funds, you will come across as more confident, reliable and trustworthy. This will also have a positive effect on a lender's decision.

Mistake #4: No Business Plan

Finally, you need to ensure that you have a solid, current, business plan to submit with your loan applications. The majority of lending organizations won't even consider lending funds to a business if they can't read a plan that details the research behind the company, the target client base, the mission statement, goals for the future, estimated sales calculations and profit projections.

A well-researched and detailed business plan will show lenders that you have a road map for the future of the company, as well as an increased chance of being able to pay any loaned funds back in full, with interest.