Applying for a small business loan can be a very tricky affair as financial institutions are known to be extremely picky and like to make certain that their investments are well protected. Applications for loans, however small, could get into rough weather unless you know what exactly to avoid that will kill the chances of success. Here’s what you should be aware of.
Not only your loan application but your personal history will come under scrutiny when you apply for a small business loan. Every bank will conduct a review of the project, your financial statements and projections, and a complete lowdown on your credit worthiness, and credibility. Lenders, especially financial institutions, will make it a point to obtain your credit report from multiple agencies, and track your repayments over a considerable number of years to find out whether you are in the habit of delaying or defaulting on your loans.
Having a bad credit history even if there had been a valid reason such as severe illness, deaths or marital-relationship problems, is almost sure to knock out your application from consideration. You should make it a point to obtain all your credit reports, and analyze them to find out your creditworthiness. If there are major errors, have them corrected before applying for a loan else if the reports are correct, consider other sources of finance that may not be as sensitive to poor credit scores.
Inadequate Cash Flow
Upon analysis of your business finances, if local lenders discover that the cash flow is patchy or completely inadequate for the business to perform as projected, they will spend no time rejecting the loan application. The health of your business and the sufficiency of cash flow is the assurance that no financial institution can afford to ignore. This is because the magnitude of cash flows is an indicator of the health of the enterprise and tells the lenders whether the borrower will be able to service the monthly payments. Experts advice business owners to keep a strict watch on the cash flows and get their houses in order before approaching lenders for loans.
Weak Business Plan
When would-be-borrowers make applications for business loans, the documentation required to be furnished include a detailed business plan, financial statements and projections for the next three to five years. In order to evaluate the merits of the application, the loan officer expects the business owner to present a detailed and organized business plan with numbers that are consistent, realistic and in keeping with the prevailing market conditions. The more vague and inconsistent the business plan is, the more the lenders become alert that the business is not being managed professionally and this acts as a disincentive for funding.
Small business owners also tend to overestimate their revenues, profitability and growth figure thinking that this will appeal more to the lenders. However, the loans department is manned by experts who have more than a passing knowledge about business operations and market conditions, so projections that are out of line significantly will result in applications being rejected outright.
Not Being Organized
Many small business owners make the mistake of being too casual when approaching financial institutions. Before making the formal application, they should do their homework thoroughly regarding what the requirements and expectations of the lender are. It is necessary that you provide all the documents that are required to support your application. Remember to check off all the items mentioned in the checklist provided by the lender, and if in doubt call the loan officer and get a clarification. You can also refer to a highly-detailed checklist prepared by the Small Business Administration for potential borrowers. Incomplete applications are more likely to be rejected because the lenders simply do not have time to waste following up with lackadaisical borrowers.
Author bio: James Acker is a small business financial adviser who has worked with many entrepreneurs to successfully obtain financial assistance from local lenderssuch as community banks and regional financial institutions.