America is a great nation and it’s expected to remain so because we have a free economy. This means anyone can turn their ideas into a business with enough hard work and financial support. Personal savings, backing from friends and family, and small business loans top the list of ways that small businesses make their start.
SMALL AND MICRO-BUSINESSES ARE ON THE RISE
As of most recent figures from the Small Business Administration, there are some 3.7 million micro-businesses in the US, making up 10.8% of the employment market. Micro-businesses are firms with less than 10 employees. These types of businesses generally last at least 5 years or more, and they take increasing levels of working capital to grow. This is where small businesses can get into trouble. It can be easy to get into financial traps and making mistakes when applying for and handling small business loans.
Watch out for these top 5 small business loan mistakes:
#1. NEGLECTING TO CHECK YOUR CREDIT SCORE.
Before you apply for any small business loan, it’s critical to confirm your credit score. If you are not sure how to check your credit score, you can visit the three major credit bureaus and complete the free online process. These are Experian, Equifax, and TransUnion. You may also want to check with the bank where you hold your business accounts and see if they can run a credit score for you.
Why is this important? Your credit score can determine your eligibility for a small business loan, how much you can obtain, and the interest rate at which you will be making repayment. The better the score, the better the business loan rates.
#2. NOT ASKING FOR ENOUGH DURING THE SMALL BUSINESS LOAN PROCESS.
As a whole, small business owners are resilient. We are used to solving our own problems and finding ways to correct cash flow issues. In the process of asking for a small business loan, don’t make the mistake of not asking for enough money. This can put you in a place where you could be stretching your finances too thin, and could end up not being able to have enough to make a business move happen.
What should you do?
When applying for a small business loan, ask for at least 50% more than you need. So, for example, if you need $5,000, ask for $7,500. Your loan payments won’t be a lot more and you will have a cash buffer you can put in the bank to cover future payments if needed.
#3. GETTING BEHIND ON SMALL BUSINESS LOAN PAYMENTS (AND OTHER DEBTS).
It can be so easy to get into the habit of paying debts late. It happens subtly at first, when one week things are slow and you are forced to choose between paying a utility vs. another less important obligation. Small business loans weigh heavily on your credit score as credit agencies look at them first. Even one late or missed payment can reduce your credit score by as much as 10 points or more, making it difficult to obtain future small business loans and other funding.
What can you do? The best course of action is to contact your lenders in advance and ask for an extension to make your loan payments. Many are happy to provide you with flexible and affordable options.
#4. TAKING THE FIRST SMALL BUSINESS LOAN YOU ARE OFFERED.
In the quest for small business funding, often owners get so excited about being approved that they jump at the first small business loan offered. This comes from thinking no one else will offer this. Compromise happens and before you know it, you are stuck with the wrong lender and difficult terms. However, this is erroneous in thinking and could set you up for failure. You could be paying too much in fees and interest rates.
How can you avoid this mistake?
Take the time to shop around for the best small business loan that meets all of your needs. Choose a financial firm that has a wide network of lenders that cater specifically to small businesses. Then work with a representative there to locate the best small business loan product that will help you achieve your goals.
#5. NOT PROVIDING COMPLETE BUSINESS INFORMATION.
From the time you start applying for a small business loan, through the time you are making payments, your lender may need to gather important information from you. This could include how long you’ve been in business, what your average revenues are over time, and what the business plan looks like. Articles of organization, information about your business bank accounts, and various financial statements may also be requested. Failure to produce them in a timely fashion can result in not getting the small business loan needed.
HOW TO PREVENT THESE MISTAKE
The most obvious answer is to have all major business and financial documents ready to share. These may include your profit and loss statements for the last year, your bank account statement, and any documents that provide insight into what kind of organization you have. If there are co-owners, then you should at least be an LLC formed corporation with an employee identification number. Have all of this information store security where you can get access to them when asked. If you don’t, you could miss out on the working capital for your small business.
It can be an exciting time looking for a small business loan, and the process should be simple and efficient. If you avoid making the above mistakes you should soon have money in your hand to expand operations and increase your profitability. Remember, the caring financial representatives at United Capital Source are here to make applying for a small business loan as simple and stress-free as possible.