Earlier this week I stumbled upon a very helpful list from AllBusiness.com. Most Main Street business owners aren’t small business financing experts and chatting with their local banker about a small business loan probably isn’t on a list of favorite things to do. With that in mind, I thought I’d share this list of mistakes (with a little bit of my take tossed in for good measure) many small business owners make when applying for a loan in hopes that it might help you better prepare for your visit to the bank:
- Not knowing your credit rating: Before you apply for a loan, you need to know your rating. It’s a lot like an attorney in a trial, they try to never ask a question they don’t know the answer to—neither should you. Get copies of your credit score from the three major credit bureaus (Experian, Equifax, and TransUnion). Make sure you check your personal as well as your business credit, because the banker will. Not only that, a low credit score will make it tough to get a loan from the bank and point you in the direction of other options.
- Not reading the terms carefully before signing: Once you have the loan, before you sign on the dotted line, make sure you read and understand all the terms. They call it “mouse-type” in the business because it’s usually so small only a mouse can read it, but you need to. What’s more, reading alone isn’t enough, make sure you understand it all. I know the banker will be sitting across from you at the desk, maybe even impatiently tapping his pencil, but take the time to make sure you understand this legally-binding document. Don’t be afraid to ask the banker to explain any section of the document you’re unsure of. That’s what he or she is there for.
- Not locking in a rate: Interest rates fluctuate daily. If you’ve found a good rate, don’t be greedy, lock it in. One thing history has certainly taught us is that rates don’t just drop—sometimes they go up.
- Not explaining what the loan is for: Your credit history, time in business, and revenue numbers are all important questions your banker will want to know. He or she will also want to know what the loan is for. It only makes sense for the bank to ask, so be prepared to give them the information they need—it could make approving the loan easier. They might even have a loan designed just for that purpose.
- Making major changes: Your banker won’t want to see major changes in the way you operate your business at the same time you’re making a loan application. They want to see stability. Bankers are very risk averse and sudden changes throw up a lot of red flags.
- Applying only to the most convenient lender: Most Main Street business owners head to the local bank first. Although there’s nothing wrong with this approach (and it’s certainly what your local bank wants you to do), you aren’t married to the bank around the corner anymore. In addition to the local credit union, there are many online resources to help you find the bank, or maybe even an alternative lender, best suited to your situation. I know of a number of tech companies here in Utah that have relationships with banks in Silicon Valley. They feel like those banks have a better understanding of their industry and can provide better service.
- Not having your finances up to date: Walking into the bank (or any lending institution for that matter) without a current financial statement and the other associated documents, is a lot like skydiving without an adequate parachute. It’s not a good idea. This is an area where many small business owners just aren’t prepared, which impacts their ability to get approved for the loan.
- Failing to have some equity in the project: Bankers like to see skin in the game. Think of it as a down payment. Bankers are less likely to invest in a project where you won’t invest any of your own resources.
- Having no collateral: Remember, banks don’t like risk. Collateral removes, or at least reduces, risk. Your banker will want to know that he can recoup some of the loss should you default on the loan.
- Not having a business plan: A business plan demonstrates that you are taking a thoughtful approach to running your business, which your banker will perceive as something that will reduce their risk. Your business plan will demonstrate to your bank that you have a plan for how you will use the proceeds from the loan, how those proceeds will impact that plan, and ultimately have a positive financial impact on your business.
If you avoid these 10 mistakes by preparing to meet your banker and still don’t get the loan you’re looking for, you’re not alone. Only about 10 percent of small businesses that visit the local bank leave with a loan. Nevertheless, you still have options. 85 percent of the small business owners that complete a Lendio profile get matched to at least one loan option. There are lots of loan options for small business beyond the local bank, but you need to be prepared.