Avoid the 10 Biggest Mistakes of Business Funding

Top10.com StaffByTop10.com StaffMar. 06, 2019
Make no mistakes when agreeing to a loan
Whether it's a seasonal slump or a pricey purchase, at some point you may find yourself needing a business loan. Plan well, and the process and funds can be exactly what you need.

Loans can provide much-needed cash to help your business stay on track, but the details involved in finding a lender and applying for funds can be confusing and lead to mistakes. Learn how to avoid common errors to prevent getting into a business loan situation that you can’t handle, that doesn't get your business the funding it needs, or that leads to unnecessary frustration along the way. 

1. Plan Ahead

Don't wait until you hit the point where your business can’t go on without an immediate infusion of cash. The business loan application and approval process can be lengthy, and ultra-fast funding options can be expensive, with higher repayment fees and rates. Take your time to research the best lender for you by reading reviews, comparing rates, and checking the funding options available for your business without feeling pressure to pay bills today. 

2. Organize Your Personal Finances 

Lenders will look at your personal credit score as well as your company’s financial information, such a revenues and expenses when deciding whether to approve your application. Even pristine business finances may not be enough to get you the loan you need if you can’t demonstrate that you’re a good steward of your own money. Keeping up on personal loan payments, such as your mortgage, student loans and credit cards, avoiding high debt-to-income ratios, and routinely checking your credit score for accuracy will help you to maintain the kind of financial picture that lenders want. Such prudent behavior will also help you avoid the mistake of poor financial planning that can impact your ability to get the loan you seek.

3. Do the Math

There’s more to paying back a business loan than covering the amount of money a lender paid to you. Interest and fees can add up and throw off your budget if you don't account for all of the costs before committing to a loan agreement. There may be fees associated with late payments, early payoff, termination, or changes in the interest rate you should total into your payments. Ask as many questions as necessary to determine if you can manage the total cost of the loan.

4. Know Your Credit Score

Your business credit score is a large determining factor in the initial approval of any business funding, and the rates, fees and repayment terms you can expect. It can be hard to know, and understand, your business credit score. It's rated differently than your personal credit is, and with many business credit cards and loans available, it's easy to be confused. You can obtain a copy of your business credit report from 1 of 3 business credit bureau's, Dun & Bradstreet, Experian, and Equifax. along with a thorough explanation. 

5. Understand Loan Types

Loans are tailored to the needs of each business, down to whether you plan to use the money for equipment, working capital, or renovations. There are dozens of loan types to choose, and it’s important to know what type of loan is right for your business situation. Choosing the wrong loan type may compromise your chances of qualifying and getting funding, put you in over your head financially, or get you a loan with conditions that don't suit your needs. Read up on the varieties of loans and the application requirements to ensure that you understand the options and choose the one that works for you.

6. Review the Contract

Take time to go over the loan agreement carefully to discuss the terms with your lawyer if you come across anything you don’t understand. If you’re not comfortable with what’s being offered, talk with the lender to renegotiate the terms or take your business elsewhere. If you look at the terms carefully from the outset, you stand a better chance of smooth sailing after the loan has been taken out.  

7. Submit the Right Paperwork

Once you’ve decided which type of loan to apply for, gather the correct documentation before approaching a lender. The list of necessary paperwork for a traditional bank loan can be extensive, especially for secured loans, and may include a business plan, business finance statements and personal financial documents in addition to the actual application. You must be able to show how you plan to use the money and how the investment will benefit your business in the long run, leaving you with enough money to pay back the loan. Thorough documentation decreases your chances of being declined, speeds up the approval process, and gets you the money you need as fast as possible. 

8. Investigate All Business Loan Options

The growing accessibility of alternative loan options means that there are many choices for business owners beyond traditional bank loans. If you can’t find what you’re looking for from a bank or credit union, or don't qualify for a loan from a bank, it may be time to look for another source. If you simply give up after a rejection by a bank or assume that you have to accept its  terms because there’s nothing else you can do, you may find yourself struggling to get out from under an unnecessary mountain of debt. There are many options for great lenders and loan types, so it's a mistake to restrict your business to only term loans from a brick-and-mortar bank. 

9. Establish a Payback Plan

Lenders often won’t consider an application for approval unless they see a plan laid out for consistent payment. Putting together this kind of plan gives you peace of mind and shows lenders that you’re prepared to return the money on time. The less risk you pose to a lender, the greater your chances of getting the loan you need at the terms you want. Neglecting this can leave you with fewer funding options and worse terms and conditions. 

10. Keep Your Business Stable

Making major financial changes to your business before applying for a loan can raise a red flag for lenders. Your business should be as stable and routine as possible, so you can prove the ability to payback the loan. Depending on the changes you want to make, it can also impact your business credit score, which you want as high as possible at the time of your application. If you're adding a lot of staff or investing in equipment, it can be wise to wait until after your loan is approved. 

Summary

Lenders are looking for business stability and ability to pay back the loan above all else. Keep these 10 tips in mind to avoid mistakes that could prevent you from getting the right loan or getting it at the rates that work for you. Not all of your company’s financial issues can be solved with a loan, but if you understand your needs and pay attention to the details, this form of financing can keep you on track. Get more practical loan advice from these educational articles.

Top10.com StaffByTop10.com StaffJun. 23, 2019
Our editorial staff is comprised of writers who are knowledgeable about financial services. We specialize in simplifying the process of choosing the right business loan lender for your needs.