Business loan application pitfalls: What to avoid when taking out a loan
If you need some extra capital to expand your company’s operations, taking out a business loan can be a pretty smart decision. But a lack of preparation or a subpar loan application can easily derail those plans. Here are a few traps to avoid if you want to see your business loan application make it to the next stage.
Not comparing loans
If you have a savings account or mortgage with one of the big banks, you might reflexively turn to them when it comes to taking out a business loan. While this might be convenient, there are plenty of savings that could be made by looking elsewhere, from online to non-bank lenders, so make sure you shop around to guarantee yourself the best deal.
Not knowing your credit rating
When deciding whether or not to approve your loan application, business lenders will want to gauge your ability to pay it back, and the best measure at their disposal is your credit score. Before applying for a loan, it’s a good idea to get a copy of your credit report and make sure there aren’t any issues or errors that could wind up hurting your chances.
Submitting incorrect financial documents
Business lenders will require you to provide a number of documents - balance sheets, cash flow statements, tax statements - to get a sense of your business’ health. It’s important that the information on these documents is correct, as if your lender runs a check and any discrepancies show up your loan application could be rejected.
It’s one thing if the information you’ve submitted contains minor errors, but it's a completely different story if you’ve been dishonest. If you’re thinking about misrepresenting your business, such as by inflating revenue or the value of your assets, think twice. There are measures in place to catch you out and the matter could see you getting blacklisted or even taken to court.
Making changes to your business in advance
Lenders will be looking for signs that your business is stable, so if you’ve undergone any sort of restructuring days before applying for a loan, it might raise a few eyebrows. That includes changes to business operations, reshuffling of personnel, and discontinuing of any partnerships.
Anything else to consider?
Once you've got all the necessary documentation in order and are ready to apply, there are a few more things you’ll need to just be sure you've considered.
Underestimating the costs
Before you sign up for a loan, you should have a clear idea of all the costs involved. Along with the amount borrowed and the interest you’ll pay on it, you’ll also have to budget for any administration fees, set-up costs, transaction fees and discharge fees.
Keep in mind that these fees may be charged differently than a regular loan and can be expressed as either a dollar figure or percentage of your loan amount. So if you’re planning on borrowing a large amount, you could be asked to fork out a large amount in fees.
Not having a plan for the loan
If you’ve been vague about how you intend to use the loan, it won’t exactly inspire confidence in your lender and could result in you being rejected. And even if you do manage to secure the loan, you might wind up with one that is unsuited to your business’ needs. You also run the risk of borrowing too much or too little, which could lead to cash flow problems down the track.
Once you’re confident all those issues are under control, you should be ready to apply for a loan. If you’re not sure where to start, head over to our business loans comparison page for an overview of what’s available.