Are you planning on starting up a small business but aren’t sure how to apply for a loan? Well, there are things you should know before you even consider applying through a bank.
Bank loans may seem like the best choice at the time, but you must weigh other available options before making a final decision. Once you find the right financing option, you’ll have to look out for the right application process and requirements.
To avoid common startup loan application mistakes, you should adhere to the steps below.
1. Inadequate Business Plan
A business plan is an overview of the current market, the target customer, marketing plans, the cost of operations, and the profit potential. Without a detailed plan, the loan application is not likely to be approved.
To prevent this mistake, entrepreneurs should thoroughly research the industry they plan to compete, form concrete business objectives, and analyze their competition. They should also create a budget to understand the costs associated with operations and identify the capital they need to acquire the necessary assets for their business.
A detailed plan means including every minute part of running the business from office supplies to manpower. Getting a detailed business plan means including office supply quotes and payroll needs. If you are not sure what covers a full payroll fund, check this page on payroll funding.
Finally, they should evaluate the potential market, by analyzing market trends and understanding the target customer, to assess the opportunity for success and make a convincing argument for loan approval.
2. Lack of Financial Documentation
Financial documents such as tax returns, cash flow statements, balance sheets, and profit and loss statements are essential for demonstrating the financial stability of a startup. Without these documents, it is difficult for lenders to accurately assess and understand the financial position of a startup.
To avoid this mistake, startups should be sure to properly document their financials and provide all relevant information needed by the lender. This is an important step to take as it lessens the risk of the lender making wrong assumptions about the startup’s financials.
In addition, it is important for startups to always be honest and transparent about their financials to the startup loan provider. Doing so will ensure their lender can easily cross-check their financial statements and provide an accurate risk assessment.
3. Poor Credit History
When applying for a small business loan, a poor credit history can be a major stumbling block. To prevent your loan application from being denied due to poor credit, it is important to ensure that all information provided on the loan application is accurate. Also, make sure that all documents necessary to verify the information are included.
Thoroughly review the loan application before submitting it. It is important to ensure that any information submitted is free of errors or typos. It is important, to be honest about past credit issues. Lenders want to feel secure that the money will be properly used and will be repaid, so make sure to provide an explanation and proof that you can and will pay off the loan.
4. Inadequate Collateral or Personal Guarantees
Many startups overlook the importance of adequate collateral or personal guarantees for loan applications. Without sufficient security for lenders, the risk of default increases.
Inadequate collateral significantly reduces the chances of loan approval. To avoid this common mistake, startups should provide an item that has substantial value in case of a default.
When providing collateral, it’s important to include any long-term investments or fixed assets such as:
- real estate
- equipment
- investments
If these are not sufficient, startups can also use personal guarantees. Guarantors for loans are typically the founders of a business, who are willing to put their assets on the line. Guarantors should make sure they have enough assets to cover the loan in case of a default.
5. Applying for the Wrong Loan Type
When you are applying for a loan, it’s important to select the loan type that best meets your business needs. Applying for the wrong loan type can have serious consequences. It could cause delays in receiving the funds needed to grow your business and, in some cases, can lead to a denial of the loan.
To avoid this mistake, you should first research loan types and lenders to find the best fit for your business. Some loan types are better for startups, while others are better for established businesses. Be sure to read loan requirements carefully and take the time to compare:
- interest rates
- terms
- fees
Also, make sure you have the documents needed to apply and double-check all the forms for accuracy. Taking the time to carefully compare your options and complete the loan application correctly can help ensure that you receive the funds that your business needs.
6. Insufficient Preparation for the Application Process
Often applicants will rush their application, not researching the best loan or reading the required information thoroughly. This can lead to:
- incomplete applications
- incorrect information
- refusal of the loan
To avoid this, it is important to create a checklist before starting the application process and make sure that everything has been read through and double-checked. It is also advisable to use an online or professional to make sure all the paperwork is accurate and up-to-date.
7. Not Exploring Alternative Funding Options
Not exploring alternative funding options is a mistake that can be avoided by researching the many options available. Options to explore include:
- business grants
- venture capitalist investments
- small business grants
Researching any government funding options and low-interest business loans could also be beneficial. Additionally, depending on the type of business, it would be wise to investigate more niche options. Many crowdfunding platforms offer loans to new businesses and angel investors can also provide capital.
Alternative funding sources have largely become more accessible than ever in the past few years, offering a variety of advantages that most bank loans may not provide. Taking the time to identify all the options available and exploring each one in detail can help alleviate the potential errors associated with applying for a loan.
Avoid These Common Startup Loan Application Mistakes
Startup loan applications are an important first step in obtaining funding for your business. The most common startup loan application mistakes have been covered above.
Taking the right precautions to avoid these mistakes and preparing thoroughly can help secure a loan. If you want to have a smooth loan application process, get help from an advisor.
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