According to a survey by Nav, a business credit
marketplace, 23% of small business loan applicants who were denied don’t know
why their loan was turned down. And even worse, 45% who are denied are turned
down multiple times.
When at least 1 out of every 5 business has not
gotten a loan they have sought in the past 5 years, lack of awareness about the
pitfalls of seeking a loan is a real problem among small businesses. When that
happens, small businesses turn to riskier sources for funding like credit cards
and dipping into personal savings, or they go without. In some cases, lack of
cash flow leads to shuttering businesses completely.
Even if you’re among the lucky (and well
prepared) business owners who have secured a loan in the past, you can make the
process smoother, easier, and more cost-effective in the future by following
these 5 tips.
1. Know your business credit score, and everything else the lender
will look at.
45% of small businesses don’t know that they even
have a credit score, and an eye-bulging 82% don’t know how to interpret them,
according to the same Nav survey.
That lack of knowledge has big consequences.
Those who are aware of their credit scores are 41% more likely to get approved,
and have an even higher likelihood of a smooth loan process.
Do you homework in advance by researching your
credit score and pulling together necessary information for lenders like:
·Personal financial
statements for owners and/or principles
·Business financial statements
and tax returns
·Ownership and affiliate
contact information and resumes
·Incorporating documents
and/or licenses
·Business loan history
·Location lease
2. Determine what will best suit your needs.
Potential lenders will want to know exactly how
much money you’re seeking and under what terms, as well as what you plan to do
with the money. That might sound elementary, but you’d be surprised how many
small businesses make the mistake of going to the bank with open-ended goals.
This is one of the most common reasons
businesses are turned down.
Also, keep in mind that there are many different
types of loans out there. Once you have your plans for how you will use the
money, take a look at options like establishing a line of credit as opposed to
a traditional one-time loan. A floating loan you can draw from might better suit
your needs, and stating that or any other needs up front will lend credibility
to your application.
3. Look at all of your options.
Some business owners just head down to the local
bank when they need a loan, and while that can be a great option, it’s far from
your only option. You might find that an online bank offers a lower interest
rate, more appropriate sum, or better repayment terms.
There are also industry-specific lenders that
might be able to give you a break based on your association memberships or type
of business.
Just be sure you’re dealing with only credible
lenders. Know their history and that they are FDIC-insured.
4. Know what you’re getting yourself into.
Banks and other lenders sometimes hide extra
fees that can really add up. I recommend you use a business loan calculator to
ensure that you can afford to pay off the full cost of the loan.
Another mistake small business owners make is
seeking more credit than they actually need, which can be costly in the long
run. This is where your accountant can come in handy to determine the right sum
to accomplish your objectives.
Once you have an offer or offers on the table,
you might need to engage in some negotiation to get more favorable terms.
5. Get the help of a trusted expert.
Who said you
had to navigate these murky waters on your own? The Small Business Administration
provides business loan resources. Even more helpful, a trusted accountant or
other financial advisor can serve as a mentor through the loan process.
We provide these services for clients regularly,
so we know what pitfalls to avoid and how to make the process go as smoothly as
possible. If you want our help to secure the right small business loan for you, contact us today.
