Securing a small business loan is not easy, and rightly so. The thorough checks are put in place to protect you, just as much as the lenders themselves as many start-up companies know all too well.
However, there are a number of business owners who have been unable to secure funding, even though they meet the criteria. This is often because they have made mistakes on their application, or they have applied for the wrong type of loan.
With that being said, let’s take a look at some of the common mistakes people make when attempting to secure a business loan so that you can avoid making them.
Shopping around is vital when looking for a business loan. Not only do you want to find the best loan terms, but you need to consider your chance of approval and the suitability of the lender.
There are lenders providing business loans for a whole host of purposes while there are also specialist lenders, offering funding for very specific purposes. You then have peer-to-peer lending websites, online lending platforms, and more traditional routes to finance.
You need to consider which lender is going to be the best match for you. Company ‘X’ may offer the cheapest terms, but if your chance of approval is very low, what’s the point in making an application?
A lender is going to feel much more comfortable giving your business money if you have a solid business plan to present them with.
Lenders need to have confidence in you. They need to see that you have thought everything through. If you have a half-baked plan, or even worse, no plan at all, you are going to find it incredibly difficult to secure funding. You may know that your business idea is going to work, but you still need to convince others that this is the case.
A standard business plan will include a description of your company, financials, products, and market. You can enlist the help of a business plan expert if you’re not confident in doing this yourself.
Lenders carefully consider cash flow when deciding whether or not to lend to applicants. Because of this, you should only apply for the amount you need and can afford. A lot of businesses simply apply for the maximum amount in hope that they will receive it. This is never a good approach.
To calculate how much you can afford to repay per month, divide your net operating income by your total yearly debt to determine your debt service coverage ratio. If your cash flow is equal to your monthly loan repayments, you will have a ratio of 1. While this is acceptable, a ratio of around 1.35 is better, so this is what you should work toward.
So there you have it: some of the most common mistakes that business owners make when trying to secure funding. If you avoid the errors we have mentioned above, you can give yourself the best chance of securing the loan you need.