6 Mistakes to Avoid When Applying for a Business Loan

One of the biggest challenges facing startups is when to take funding to help them scale and the best way to source it.

They’re spoilt for choice. How you go about increasing the revenue you need requires sincere thought about whether the company wants to take on debt or reduce equity, or both.

The option includes crowdfunding, which can vary from equity crowdfunding to product presales, to a line of credit with your bank, microloans, private equity from venture capital companies, or a traditional business loan from a bank or other financial institution.

Convincing others to support your vision requires effort and attention to detail.

You may have done a great job crowdfunding your startup so far, but due diligence investors demand before they’ll intervene with financial support means you will need to demonstrate a thorough understanding of your venture and the way forward.

The most challenging part is that each option has different demands and criteria you need to satisfy, especially if you’re asking for a traditional business loan. And, while it may be your best option, there’s more to it than waiting for the check to arrive.

Assuming That Bad Credit Score Won’t Matter

When upscaling ventures apply for loans, they’re able to rely on the strength of their business and their revenue history to qualify. Startups, on the other hand, are still unproven.

That means banks won’t feel confident giving you the financial backing based on your company’s finances alone. Sometimes credit unions can be more accommodative if you already have an established relationship. Someone like Gordon Simmons Service Credit Union Banking Leader is an option to explore. They will be able to assess your particular situation and give you the best advice to move forward.

Instead, banks and other financial institutions will assess your credit history and personal finances before they make a decision. If you have a bad credit history, lenders will be less likely to collaborate with you. Conversely, a high credit score will increase your chances of being eligible for small business loans in Canada. 

When planning to collaborate, you should check first your partner’s credit profile before deciding the percentage of ownership. Therefore, before applying for a loan, you must double-check your and your partner’s credit history.

Having No Specific Purpose for the Funds

Lending companies want to make investments they think are smart, so they will have questions about how you plan to use the capital. Usually, lenders are looking for business plans that show projected growth or a concrete reason you need to “spend money to make money.” It’s yours to take, which means you’ll need to come out with a concrete and eloquent plan on how you plan to scale or increase your revenue. By doing so, you will put yourself in a better position to pay back the loan.

Not Doing Enough Research

Different banks and lending companies will verify your application in different ways. Some may see your business as a risky borrower, while others might view your business as a low-risk partner. The truth is, it will all depend on each lender’s expectations and application requirements.

If you go with the first loan you’re eligible for, the chance is you will risk paying more in interest costs and fees than you deserve.

On the other hand, applying for a loan you’re not eligible for just guarantees a denial of your application. And, every time you look for a loan that requires a credit check, the lending company will do a hard pull on your credit score. That means you can drop your credit by 5 to 10 points, which can make it difficult to get approved for credit in the future.

Take time to research the loan and ensure you’re qualified for it. If you’re still uncertain about some basic requirements of the loan, call the bank and ask.

Borrowing More Than You Need

Another important thing to remember when applying for a business loan is that you will need to let the lender know how much you want to borrow.

Though it’s tempting to take more than you can carry, you don’t have to. In fact, borrowing more than your venture actually needs can get you into serious trouble.

The more funding you require, the higher your monthly payments will be, and the more interest you’ll owe on loan. If you ask for more than your need, the payments may be too high for your budget. Instead, only borrow the amount you’re confident you can replay in full.

Not Seeking Expert Advice

When applying for a business loan, banks will want to see if you’ve sought guidance from professional advisors.

According to industry experts, accountants can be an ideal source of advice for startups and small business owners. However, there may be other places where you can find professional advice, such as a free mentoring service or retired business people who can teach about the kind of capital that is most important to professionals within your industry.

Experts also recommend business owners get financial advice from business networking groups and perform research on the platforms of the leading alternative funders. Other resources that provide professional financial advice and counseling for first-time entrepreneurs include local and regional business groups.

Being Uncertain About Your Business Goals

So much of the application process is methodical, managed by the orderly presentation of precise documentation that it’s easy to overlook the innately emotional side of this process. Too many entrepreneurs simply don’t demonstrate why they are good applicants for a loan. More often than not, applicants approach lending institutions with an apathetic attitude.

In addition to convincing your lender why you should qualify for their financial backing, you need to radiate enthusiasm and faith in your startup to draw the lender and make them a believer. To be genuinely convincing, you must tell a story of your startup that the lender finds compelling.

There are a lot of things to consider when applying for a business loan, and it can seem overwhelming. But knowing what to avoid will help you assess the basics of the loan and better understand exactly what you’re getting and what you’re paying for.