Small business owners usually have a lot on their plate. Preparing a loan application takes valuable time away from your business so you want to be sure to get it right, the first time. Mistakes on your application can cost your business lots of time and of course, much-needed capital.
Here are the top 10 mistakes to avoid when preparing your business loan application to ensure you get the funding you need as quickly as possible.
- Using inaccurate or out-of-date financial information
It’s important to maintain your financial records as lenders will definitely assess these documents as part of your application. Errors or out-of-date information can delay the application process or worse, make your business seem like a riskier investment than it really is! Having the proper documentation provides lenders with the right information they need to approve your application quickly.
- Not knowing your credit rating
Both your personal and business credit history will be evaluated, so make sure you know your credit scores, especially if your business is juggling several different credit cards. Your credit activity is generally kept on file for five years, so focus on maintaining a good credit history to improve your approval chances.
- Not having a business plan
A clear business plan is important for every business seeking a loan, but it is especially critical for newer businesses who do not yet have a proven track record of profitability. Lenders want you to communicate your goals, how you will achieve them and data to support your plans. A detailed business plan helps minimise the risk of investment and ensures that lenders will take you seriously. While it may not be a requirement for all loans, a solid business plan will increase your chances of approval.
- Not explaining how you plan to use the loan
Lenders will want to know how you plan to use the funding and how it will help your business succeed and grow. This demonstrates that you are organised and clear on your business objectives and builds trust with lenders. If you do not offer a clear explanation, you might leave lenders wondering how serious you are as a business owner and whether you are capable of making your repayments.
- Making a major change to your business
If you’ve read our article on How Lenders Assess Business Loan Applications, you’ll know that lenders want to see evidence of stability within your personal and business finances. Similarly, making significant changes to your business structure, products, customers or personnel right before applying for a loan may give the wrong signal to lenders. While it’s important to do what’s best for your business, making changes could hurt the perception of your business.
- Not having equity in your business
Lenders want to know that business owners are reliable and committed to making the business a success. If a business owner does not have some equity in their project, lenders may be less enthusiastic to take a risk and provide a loan. It’s not a necessity but having equity in your business can increase your chance of securing the loan.
- Not having collateral
Collateral is not always required for a loan, such as when you are applying for an unsecured business loan. Pledging collateral, however, is required for certain types of loans and even if it’s not a necessity, can increase your chances of approval. Collateral minimises the risk by lenders, as it acts as security in the event you are unable to make your repayments. If you’re not sure what counts as collateral, check out our page on secured loans.
- Applying for the wrong type of loan
There are lots of different types of loans available to businesses, so it is important that business owners consider which type is best for their business. Applying for a loan that doesn’t suit your business needs or with strict requirements will likely be a waste of your time and energy. You’ll want to consider how much capital you need, what you need it form, whether you can provide collateral to secure the loan and your preferred terms and repayment options. If you are a startup or Aboriginal or Indigenous business owner or working in certain types of professions, there may be loan options that are specific to your needs.
- Not reading the terms carefully
This is more of a mistake you might make AFTER you’ve been approved, but it is important to remember to read the loan terms carefully before signing. Make sure you understand what’s expected of you. You need to feel comfortable with the length of the loan, the frequency of your repayments and any specific policies that are put forward by the lender. Be sure to ask questions if there is anything you do not understand.
- Waiting until it’s too late
Many business owners wait until they are facing financial troubles before they apply for a loan. This adds more stress to your situation and leaves you and your business vulnerable. You might be digging a bigger hole for yourself if you rush through your application are not approved. Short term business loans can have a quick turnaround - with a Lumi Business Loan, businesses can often get a decision within 24 hours and receive their funds the next day. But don’t wait until you are desperate to apply. Take the time to consider your options and you’ll end up with a loan that’s right for your business.
When you have the right information at your side, you can make a better decision for your business. Be sure you compare the different types of loan options available and have an understanding of what lenders are looking for in your application.
If you’re ready to apply, let’s get started! If you’re not sure whether a loan is right for your business, feel free to get in touch at 1300 00 LUMI.