The process of obtaining a small business loan is often categorized as “daunting” or “intimidating.” This is largely because there are so many things someone can do wrong before applying for funding. One mistake can result in rejection, a hazardous partnership, or default. But if you can avoid these mistakes, you should have no trouble accessing the right small business loan and paying it back on time. Small business loans are all about preparation. The more time you spend preparing to apply, the more likely you are to find the program that’s best for your needs. Yes, small business owners are notoriously busy. But the difference between the right small business loan and the wrong one can alter the course of your business’s future. This process is more than deserving of your attention.
Here are 4 common mistakes people make when shopping for small business loans:
1. Asking For The Wrong Amount
Initial success can be a blessing and a curse for small businesses. When demand and revenue are on the rise, it’s only natural to believe that they will continue to grow. You envision a bigger team, a new office space, or a series of bulk inventory orders. So, when speaking with financial institutions, you ask for a great deal of funding. Getting rejected is not the only risk at stake. If you are approved and your momentum fades, you could end up with significant working capital or human capital that is going unused.
Then there’s the additional expenses associated with your new resources. Your team might need equipment, and you’ll have to pay their salaries well before they start contributing to revenue. This could take weeks or even months. The real mistake here isn’t asking for too much money or too little. It’s simply being unrealistic about the future. All the momentum in the world should not distract you from reality. The only resources you should be concerned about are those that you can support with (nearly) 100% certainty.
2. Not Thinking About The Future
This is probably not the only time you’re going to need additional business funding. You might need another small business loan for another substantial investment in a couple of years. Or, you might need a perpetual source of funds to help cover business expenses every few months. When researching financial institutions and products, think about your financial circumstances for the future.
If your business is prone to tumultuous cash flow, you might be better suited with a business line of credit than a traditional business term loan. The idea is to apply before you actually need the money. Once you are approved, you can then borrow from your credit line at any time. With a revolving business line of credit, your full balance becomes available again once it is paid back. So, instead of having to apply for loans over and over again, you can just keep on borrowing from your credit line.
3. Not Researching Enough Institutions
The research phase for small business loans refers primarily to financial institutions. If you can fulfill the basic requirements with flying colors, you’ll be able to work with the most reputable options. Owners of smaller or younger businesses, on the other hand, might have to research a potential partner’s reputation before making a commitment. Other factors to consider are customer service, whether your payment history will be reported to major credit bureaus, and the likelihood of accessing multiple rounds of funding. For example, you might choose an institution with slightly higher interest rates because once you pay off that first loan, you’ll be immediately eligible for a second, larger round of funding with more advantageous terms.
4. Waiting Too Long To Apply
You may have noticed that the requirements for business loans have decreased as of late. This is due to the new standards for staying competitive in the small business world. Certain resources are too important to be put off, just like certain problems are too dangerous to ignore. Companies like United Capital Source were formed to help businesses act now. The application process is extremely quick, and you don’t have to be in your peak sales season to be approved. There’s no discrimination against younger and/or smaller businesses, even with poor or little credit history. As you can see, there are now less and less excuses for waiting too long to apply for funding.
So, if there’s a resource you absolutely need or a problem that absolutely needs to be fixed, don’t wait until you can afford to purchase or fix it yourself. Today’s market demands that these decisions be made in increasingly shorter time frames. Thankfully, that’s a lot easier to do now that there are so many solutions within reach.