There is nothing worse than a great business idea that dies on the table because of a mistake on a loan application. We have seen this many times. The reality is that dreams take money and raising capital often comes down to how you present your idea and present your ability to execute on a plan to deliver it. The good news is that bankers and financial institutions really want to lend you money. That is what they do and how they make a living, but in order to lend they need to have confidence that you will pay them back. If your aim is to expand your business, financial institutions will want to know if the business they are funding is able to repay the loan or can sustain itself in the near future. Below are a few of the biggest mistakes we have seen small business owners make when applying for a business loan.
1. Cooking-the-Books – A common mistake that business owners make when seeking a loan, is exaggerating the numbers. Any financial information regarding your business should be clear and tangible. Here at IBC we see a lot of application turndowns in which a small business owner has exaggerated figures. Often this is an honest mistake that occurs when the owner is guessing at the numbers and not really sure of the actuals or simply “rounding up” in order to please the bank forgetting that a bank can still verify the information on your application. All this does is affect confidence and lead to loan denials if the verification process shows different figures from what you submitted. It is good to be accurate with the information that you fill in the loan application forms even if their willingness to loan is at a lower amount. If you want to increase chances for loan approval, present accurate balance sheets, cash flow statements and any other relevant documents requested.
2. Clear Intent – Lenders want to know exactly what you plan to spend the money on. If you are not sure or it is unclear, that is a recipe for rejection. Any banker worth his salt will want to know how any loan applicant intends to use the funds to improve their business. Unfortunately, one of the most common thing we see from business owners is failure to clearly describe how they plan to spend the money they are requesting. This leads to loan denials by most lenders since a lender wants to lend you money so that you can increase the revenues of the business and be able to repay back the loan with interest. Banks want you to spend money on the right things that will improve your current business’ position. The lender wants to see the needs of your business and evaluate whether the money to be borrowed is enough to meet those needs. You will also want to be brief and to the point when describing your needs and how these funds are going to help you start your idea or expand your business.
3. Run Your Credit Before They Do – The mistake of not knowing your personal credit ratings before applying for a loan may lead to a loan denial. The credit reports clearly outline how dependable are you when it comes to payment of bills and any debts. The figure can tell whether someone can trust you with their money or not. The good news is that the higher the credit rating you have, the higher the chances for your loan to be approved. Knowing what blemishes you have on your credit will allow you to start cleaning them up in preparation for funding, and in some cases allow you the time to preemptively develop a explanation for the negative marks. It is never good to be confronted by a lender with a credit problem that you are unaware of.
4. Have a Business Plan – Remember, your banker will need to get approval from a board or a supervisor to make your loan happen. So you need to arm him with a solid understanding of your business. A business plan is a great way to do this. You should have a road map that clearly shows how you want to operate your business for growth purposes. The business plan should then be submitted along with your applications.
In short, you have to show the lender how injecting money into your business will be able to generate more revenue. Understanding your market, your costs, your breakeven points etc. will build confidence in the lender and increase the likelihood of the loan approval. A proper business plan should include the target market and the goals of the business, as well as expected future growth.
In Summary, lenders are looking for consistency and thoughtfulness on the part of the borrower. Of course the underwriters are going to review the numbers to make sure the loan meets the institutions risk profile but don’t let these four simple things stall the process before you even have a chance. Know your numbers, have clean intent and state your needs clearly. If you do that, you will be on your way to achieving your dreams!