A startup or business loan can be necessary for many soon-to-be business owners trying to get their fledgling company off the ground. Many people can have excellent business ideas and a robust business plan, but they can’t bring their ideas to life without financial assistance from a lender. However, no matter how brilliant your business idea is, a startup loan isn’t guaranteed. Avoid some of the following mistakes, and you might stand a better chance of success.
Not Having An In-Depth Business Plan
Whether your business started as a hobby and transitioned into a business or you’re starting it from scratch, you might not have your startup loan request approved if you don’t have an in-depth business plan. Lenders want to be sure that your business vision has profit potential, and you must have a detailed road map to show that’s the case.
Fortunately, not having a business plan right now doesn’t mean you can’t create one and present it to a prospective lender. You can download a business plan template from the U.S. Small Business Administration website and fill in the gaps with as much information as possible. A traditional business plan follows this format:
- Executive summary – What your company is and how it can be successful
- Company or business description – Detailed information about the problems your business solves and any competitive advantages it will have
- Market analysis – Show an understanding of your target market and industry outlook
- Organization and management – Who will run your company, and how it will be structured, including the legal structure
- Product or service line – The products and services you offer and their benefits to consumers
- Marketing and sales – Your methods for attracting and retaining customers
- Funding request – How much funding you’ll need, and what you’ll use it for
- Financial projections – How much you expect your business to earn and information on how your company can be a financial success
- Appendix – Supporting documents and materials, such as permits, contracts, and credit histories
Not Researching the Best Lender
You might have access to hundreds of different lenders willing to offer you money, but that doesn’t mean all will suit your needs or align with your goals and vision. Find out as much about each lender as possible and compare their structures and features, such as interest rates, fees, customer service, loan amounts, and documentation requirements. The more you learn about prospective lenders, the more confident you might be in applying for funding from a specific lender you have faith in.
Borrowing More Than You Need
After fulfilling your preferred lender’s eligibility requirements, you might be surprised to learn that you’re eligible for a much higher loan than needed to get your fledgling company off the ground.
It can be tempting to borrow the maximum amount, knowing you can put it to good use. However, borrowing more than you need can sometimes have severe financial repercussions. You might not be able to keep up with repayments and can end up in significantly more debt than you started with.
Borrowing Without Checking Your Credit Score
You obtain a credit score, good or bad, as soon as you start building credit. The most common ways to build credit include opening a credit card, making rent and utility payments, and taking out personal and car loans.
Most people won’t give their credit score much thought as they go about their daily life, but it can have a significant bearing on your favorability for a business startup loan. If you’ve missed payments, made late payments, defaulted on loans, or filed for bankruptcy in the past, these can all contribute to a lower credit score.
You might be seen as a financial risk if you try to obtain a business loan with a less-than-desirable credit score. While some lenders are still happy to lend to you, they might do so at a much higher interest rate than would be offered if you had excellent credit.
If you’ve been considering applying for a business loan, check your credit score before proceeding with your application. You can then learn about any ‘black marks’ against your score that you might need to rectify to be eligible for more competitive lending rates. Once problems have been identified, you can start working on improving your credit score in some of the following ways:
- Dispute reporting errors
- Pay your bills on time
- Keep credit card limit utilization at less than 30%
- Become an authorized user on someone else’s credit card account
- Add rent and utility payments to your credit score
Applying to Multiple Lenders
In your hurry to secure lending to get your business off the ground, you might decide to apply to multiple lenders. It’s easy to assume that the more lenders you apply to, the greater your chances of securing funding in your preferred time frame.
However, putting in multiple applications might be more harmful than helpful. The many inquiries into your credit score might cause it to drop, potentially making it harder to secure the competitive lending rates you were anticipating.
Instead, apply to the most suitable lender, and be patient. If they cannot provide a loan with the terms you were hoping for, you can move on to other lenders until you find one that satisfies your requirements.
Not Reading Your Borrowing Terms and Conditions
Ideally, borrowing money from a financial institution, such as a bank, should be as easy as specifying the amount and setting repayment terms. However, the average loan agreement can be far more complex.
Before signing your loan documents to lock yourself into an agreement, set time aside to read through the fine print. Don’t be afraid to involve your accountant or lawyer if you’re unsure of specific details. Understand the charges you might face, late payment penalties, loan fees, and any foreclosure conditions. It’s essential to have a firm grasp of the intricacies of a business loan before you agree to one.
Most business loan providers work hard to make sure that applying for a startup loan is a fast, easy, and stress-free process. Still, business owners can encounter problems when they make mistakes during the borrowing process. Avoid these mistakes above, and you might provide a solid foundation for a seamless loan application process.
