Mistakes small businesses must avoid when applying for a bank loan

Getting a loan for a small business takes a lot more than simply walking into a bank and walking out with cash. Banks are very particular about whom they loan money to, and you must create the right impression if they are to consider you.

There are a few common mistakes that small business owners tend to make while applying for a loan. Here are a few tips on how to avoid them and improve your chances of securing a loan.

Not knowing where you stand on credit rating

Before you begin the process of applying for a loan, understand what your credit rating is. Banks use credit reports to ascertain how you handle your credit. If your personal credit score leaves a lot to be desired, the assumption would likely be that you would take the same lackadaisical approach to business credit as well. Sometimes, a bad credit score may be caused by extenuating circumstances, but it is a real barrier to getting a loan for a small businesses. If you have bad credit, you may have to consider non-traditional financing options.

Providing vague financial statements

A bank is more likely to consider your application favorably if you have a properly structured loan file with an accurate balance sheet, income statement, cash flow forecast, and business and personal tax returns for the last three years. If you fail to provide proper details or the information appears vague, you are less likely to be approved for the loan.

Lack of a business plan or collateral

No bank will give their money away if they think that you do not have the ability to pay it back. In your loan application, mention in detail how you are planning to make the revenue for repayment. Also include details of collaterals. Explain how the loan amount will help your business prosper and the amount of money you expect to bring in.

Approaching the bank only for a loan

Banking, especially for small businesses, is all about relationships. A banker is more likely to lend you money when you have the need for it if they already have a relationship with you. Make it a point to develop that relationship in person by keeping in touch with the bank even when you have no need for a loan.

Applying only to the local bank

There are several lenders that are available if you’d only look. However, most small business owners approach only their local bank without shopping around for other lenders. The loan programs of Small Business Administration and credit unions are worth considering.

Having zero equity in the business

If you do not have your personal equity invested in the business, the bank will be less inclined to take on the entire risk and lend you the money. Make some investment in the business to communicate your commitment to the project.

Follow the above tips to significantly improve the chances of getting approved for a business loan.

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