The 5 Biggest Mistakes Business Owners Make on Small Business Loan Applications
By Tom Gazaway
In our work at Hawkeye Management, we work with a lot of small business owners who’ve struck out in trying to get a bank loan. There are some basic mistakes owners make in their loan application process that often doom their chances of getting the money they need to grow their business.
Here are the five most common mistakes we see:
- Not understanding all your options. There are only two basic ways to raise money for your business — taking on debt or giving away equity. If you’re on the debt side trying to get a loan or small business line of credit, you need to know all the options available to make the right decision for your business. For instance, do you know about equipment financing, factor lending, purchase-order financing, unsecured business loans, merchant financing, or 401k ROBS transactions? These are a few of the different types of debt solutions for small-business owners. If you don’t know what they all are, you can’t know which type would be the best fit for your business.
- Not identifying the right lender for your business’ needs. Not every bank will give you a business loan without collateral. Do you know which banks have a larger appetite for your type of loan — say, financing for a multi-unit apartment building? If your credit isn’t great and you’re financing a $50,000 piece of construction equipment, do you know the non-bank lenders that might want those deals? Matching the business loan to the right lender is how these deals get done. Most small-business owners simply go to the local banks they know, or national banks they may have heard are lending, without an understanding of which lender might be most interested in their particular loan type.
- Not dealing with the right person at the right lender. There are many reasons most banks only approve 10 percent or less of the business-loan applications they receive. One reason is the person you contact at the bank isn’t experienced at putting together a loan package. They don’t know how to talk to a loan underwriter when there’s a problem or question about your application. We have had many instances where owners had their application denied by multiple banks. Then we take them right back to one of the same banks they tried — but give the deal to a more qualified banker, who understands how to package the deal and present it to the underwriter — and get their loan done.
- Not knowing your lender’s credit requirements. Do you know what kind of credit score your bank is looking for? Many banks will automatically turn down a small business loan application if the business doesn’t meet their minimum FICO score requirements. Sometimes you can find out a bank’s requirements ahead of time, but other times you won’t know unless you’ve done previous loan deals with the same banker. Some lenders also have credit criteria that determine if they will do a deal without collateral. You need to know your credit inside and out to know where you might be able to match up your loan with an amenable lender.
- Not keeping your business and personal credit separate. If your business credit and personal credit get mixed up together you can hurt your FICO score, increase your debt-to-income ratio, miss out on potential tax credits, and miss opportunities to build up your business credit. When small business loans aren’t done right, they can impact your personal credit rating.
Have you had trouble getting business credit, or a small business loan recently? Leave a comment and let us know what happened.
Photo via stock.xchng user alifarid
Hello Tom, I appreciate the way you present your information.
My situation is this: After twenty eight years of struggle, single parenthood and underemployment capped by two grueling years of almost total unemployment I secured my dream job.
After one year working with the new Job- My Family helped me finance the purchase of the company with a personal advance on my inheritance and a very good business proposal and arrangement with the owner. This was a 26 year old financially declining but secure Incorporation with annual sales of just over 100,000. dollars, that I am certain I could revitalize and refresh successfully. As new owner I opened a brand new bank account with TD Canada Trust. Start up fees were high. One month into my ownership I had taken stock and made list of equipment upgrades, license change over fees etc. totalling about 7000. I approached my business financial advisor and was told that the account needed to be at the BAnk for at least a year before they could assist me. They also said, however, that my business credit and finance issues would be declined due to my personal financial history and less than stellar credit score resulting from some pretty hard times and bad fortune. (long story I need to tell) I have proceeded with business “as was” for a complete year now but the lack of resource updates etc is beginning a small but steady declining trend that disturbs me greatly. I still find myself unable to find financial counsel to acquire the resources to move forward and upward. I’m still so confident that- even sitting here at the top of the down stairs staring into in the Dark from time to time can’t prevent me from still asking if someone with your kind of expertise could offer me the new hope and guidance that i lack to take another step forward. Thanks for your time.