As the business owner, you should avoid four mistakes to secure a small business loan. Whether your business needs a traditional bank loan or fast capital from an alternative lender, there are a variety of steps you can take to improve your application and it’s successful approval. As in most business activities, it helps to learn from the mistakes of others.
Here are four common errors that business owners make when trying to secure capital funding:
Inadequate Financial Reporting
A start-up business owner faces constant daily challenges to keep moving the business forward. Often financial reporting, whether done via an in house accountant or subcontracted externally, is viewed as a “low priority”. That’s understandable, but a common mistake. Traditional banks and alternative lenders require updated and comprehensive accounting reports in order to determine if your business is “credit worthy” to loan money to. This financial reporting provides a snapshot of the current standing of your business and is a starting point for any loan application.
Advise your accountant that you will be soliciting a small business loan. Your accountant should anticipate and respond to questions concerning the future business plans, use of the requested loan capital, and to update the financial reporting. This reporting should include the business profit and loss projections, cash flow statements, balance sheets, income statements and recent tax returns. As the business owner, you likely will need to provide your own, personal financial status and credit history.
Why such a focus on the financial reporting? From the Small Business Administration (SBA) research, only fifty percent of start-ups survive the first five years, and only thirty-three percent of them survive for ten years. Financial lenders understand the high risks inherent in new start-ups businesses which is the category your business fits into. All of this data will help potential lenders to see if your business can actually afford a loan, to what value and risk for repayment.
Lack Of Business Priority In Use Of Loan Funds
A financial lender desires that the business owner prioritize the use of the loan funds toward the short-term success of the business. It is in the lender’s best interest to minimize risk on the loan by having the business owner direct the use of the funds where they will help the business grow and be profitable. Unfortunately new business owners often do not have a clear idea how they would prioritize the use funds from the financial lender.
Before you even start the process of a loan application, you should spend the time investigating if your company really needs the additional capital, given the incremental loan expense and interest to the business. You should be able to justify the need and usage of the loan funds to your accountant, who has intimate knowledge of your business, and can serve as the role of the financial lender. Show the financial lender that your reasoning is sound by explaining what additional funds will be used for, and the beneficial reasons behind the spending.
The financial lender will look positively to the following loan plans:
- To purchase physical assets like real estate, building or needed equipment.
- To invest in product or service developments to add to future sales and market expansion.
- To purchase additional inventory or staffing to cover seasonal sales activities.
The financial lender will look negatively to the following loan plans:
- To finance ongoing losses in your business.
- To purchase non-essential physical assets not directly related to your short-term business growth.
- To purchase or rent fancy office location rather than using existing facilities or office outsourcing.
Applying Too Late For The Loan
You are a small business owner and always busy with the business. You’re probably like many business owners that apply for the loan when it is too late. That is a mistake. You want to apply for a financial loan when you have the luxury to wait, rather than being desperate for the loan funds. If your business is desperate for the funds you will need to go with any financial lender that will loan funds, instead of the one offering the best deal. Give yourself plenty of time in this process.
You should identify potential financial lenders in advance. Cultivating personal relationships with key contacts at the financial lenders will help your credibility at the time of submitting your loan application and likely have a positive effect on the lender’s loan application decision.
No Business Plan
Your business plan is your road map for the future of your business. No map, no idea where your business is going. A financial lender expects to be able to review your business plan to determine whether it can assume the risk of loan approval with a reasonable expectation of consistent repayment, with interest. Your business plan should detailed the research supporting your business model, target customer base, mission statement, competition, projected future goals, sales and profits. Again, leverage your accountant’s knowledge and experience to provide you an third-party perspective and critique of your business plan.
Four common mistakes a new business owner makes in applying for a business loan are presented. These include lack of strong financial reporting, insufficient clarity in the intended business uses of the loan capital, applying too late for the business loan, and a poorly thought out business plan. As a small business owner you should use the expertise and experience of your accountant in preparing for dealing with the financial lender, documents and loan application. Proper preparation, anticipation, and cultivating relationships with potential financial lenders will offer your business a greater opportunity of success of loan approval.
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