One of the most common obstacles for small business owners face is having enough funding. This includes the short-term capital needed for day-to-day operations like rent and salaries, and funds for things that drive growth like increasing staff, adding new equipment, expanding locations, or marketing. You can access that funding by applying for a small business loan, but this process can be complex and daunting at times, especially if this is your first time applying.
To help you prepare for the business loan application process, here’s a list of six common issues and steps to avoid them. With this guide, you’ll be on your way to a smoother loan process and a successful business loan.
1. Inaccurate financial documentation
If you submit a loan application with inaccurate or incomplete financial documents, you could delay your funding or even lead to a denial. To prevent this from happening, you should always be updating and maintaining your financial documents, so that when it comes time to apply, you’ll be ready. Here are some tips to help keep your documents updated and accurate:
- Get your bookkeeping program in order: If you’re among the small business owners who keep paper ledgers, now is the time to switch to a bookkeeping software program. Most lenders frown upon error-prone written ledgers, and systems such as QuickBooks can automate many of your financial tasks, including invoicing, and easily generate financial reports.
- Have a clear system in place: Your record-keeping process should be organized and consistent. This includes recording all transactions promptly and regularly, so there are no missed or confusing transactions. It’s also a good idea to maintain a system for storing these financial records, like invoices, bank statements, and receipts, so you can easily access them when you need to.
- Keep business and personal finances separate: You’ve likely had to use your personal funds while launching and growing your small business. However, separating your business and personal finances is essential to better managing your business’s finances, simplifying the tax-filing process, and protecting your business if you’re audited.
2. Missing a solid business plan
Your business plan is an essential guide for your business, but it’s also a key tool when applying for a small business loan. It’s like a “dashboard” with key signs of business performance and organization, and lenders use it to determine whether you have the knowledge and skills to run a profitable business. Your plan should include your executive summary, business description, outline of industry and competition, as well as previous experiences that demonstrate your ability to run it well.
If you don’t have a plan, it’s time to create one. If you already have one, spend some time revising and improving yours, and focus on what lenders are looking for in a business plan.
3. Undefined loan purpose
When applying for a small business loan, you’ll need to know how much funding you need and why you need it – give your lender a clear plan for your loan purpose and the amount you need.
Be ready to talk about your project and have an itemized list of the ways you’ll use the loan and how you determined the costs for each of the items. If you don’t have a clear purpose, this could negatively impact your lender’s decision, as well as your business if you’re approved. Be sure to take a hard look at your financial needs before you apply.
4. Unestablished credit history and management
Your personal and business credit scores are key considerations when applying for a small business loan. It shows lenders how good you are at keeping up on payments, and if you can responsibly take on new debt.
Check your personal and business credit report by getting a copy of your credit report from AnnualCreditReport.com. Review them closely, immediately report any errors to get them fixed, and address issues like outstanding payments that hurt your credit rating. Keep in mind that credit bureaus can take up to 60 days to update your credit report – take needed steps promptly so that when it’s time to apply, these issues are resolved.
If you’ve had past issues affecting your credit score, don’t stress! Here are some strategies to improve your creditworthiness:
- Set up automated payments: With auto-pay, the amount you owe is withdrawn each month. This ensures that your payments are always made on time.
- Improve your credit usage: Even if you have a perfect repayment history, having debt balances that are more than 30% of your credit limit will lower your credit score. To help fix this, you can either pay down your balance so you’re only using 20-25% of your total credit, or you can ask for a credit limit increase.
- Establish payment plans for your current debt: If you’ve fallen behind on any debt or you’re facing a challenging time that will affect your payments, get in touch with your creditor to negotiate a payment plan. This will make the impact on your score much more manageable.
5. Insufficient research of your loan options and lenders
It’s important to take time to research and explore different types of business loans and lenders. The requirements, fees, and costs, as well as a lender’s credibility and reputation, are significant factors to consider during your research. There’s a lot you need to know before you choose the right funding option for your business.
It may take some time to find the right lender and program for you, but it will pay off in the end once you have your loan approval and the funding to support your business.
6. Incomplete loan application:
While this may seem obvious, many business owners have submitted incomplete or inaccurate applications. If questions aren’t answered fully and truthfully, lenders may question your integrity. Negative information may lead to a loan denial, but misrepresentation or withholding information likely will. Lenders want to invest in quality – make sure they know that you’re a good choice.
Review the application multiple times, check every detail, answer questions accurately, and make the best impression you can. Your application checklist can be a great source to ensure you have all the documents you need.
Take the time to prepare for your loan application
It’s also important to build a relationship with your lender that focuses on trust, transparency, and communication, so they can help you with these issues along the way. Preparing for the loan application process goes a long way toward improving your chances of approval. Take these steps well in advance of applying – at least two to three months – and you’ll not only be better positioned for the process, but you’ll find that you’re managing your business more effectively as a result, too.
Pursuit is here to help your business succeed
And when you’re ready to apply, take a look at our financing options – they’re all tailored to meet the needs of small businesses. We offer more than 15 loans and a line of credit for small businesses in New York, New Jersey, Pennsylvania, Connecticut, Illinois, and Delaware. In addition, Pursuit’s Business Advisory Services offer expert consulting services in financial management, human resources, marketing, and more at no cost to Pursuit borrowers.
Apply today to learn more!