Small business owners are known for juggling dozens of tasks at once — and if you’re at a stage where you’ve decided to apply for a loan, chances are that you’re busier than ever as you plan your expansion project or manage your cash flow. But while loan applications can be time-consuming and it’s tempting to skip corners, this approach will cost you more over the long term if your application is rejected the first time around. So, what are the do’s and don’ts of a small business loan application?
That’s a question we feel well-placed to answer at Capify, after processing thousands of applications, accepting many of them and rejecting a few. Here’s what you need to know.
Small Business Applications: Must Do’s
Let’s start on a positive note — here is what every small business owner should be doing before they apply.
1. Know what you’re planning on using the loan for
You can’t just apply for a loan today and wait to figure out exactly what you’re spending it on when you receive the money. Even a vague idea that you’ll “invest in new staff” isn’t enough — you need to be specific. This puts the lender at ease that you’ve thought things through and expect to use the money to invest in business growth and not throw it down the drain.
Ideally, it helps have a clear business plan outlining the company’s profitability and forecasts for the future.
If you’re a new business, it may also be helpful to have collateral. While there are plenty of unsecured loans out there, having collateral to offer if necessary helps to put lenders at ease and prove that you’re committed to making your repayments.
2. Apply for the right loan type
People often talk about business loans as if they’re all one and the same. This is far from the case — there are various types, from lines of credit to equipment financing. Although you can use a standard installment loan for many purposes, it’s best to check what else is available first as an alternative might suit your needs better.
Plus, you may be eligible for a loan designed for a specific demographic, such as if you have a startup or are from an ethnic minority.
3. Read the terms and conditions properly
How many times have you quickly flicked or scrolled through the terms and conditions of something hurriedly and signed them without having a thorough read? It might not be a big deal when you’re downloading the next upgrade of a smartphone app, but signing a loan contract is serious business. You need to know what you’re agreeing to.
Pay special attention to any hidden fees, the loan term, and when you’re expected to make repayments — and don’t be afraid to ask for clarification if there’s something you don’t understand.
4. Have equity in your business
Lenders like to see that you have “skin in the game” when it comes to your business, meaning that any successes or failures will affect you directly. This shows a higher level of commitment and therefore reliability as a borrower.
Like collateral, it’s not a strict requirement, but it certainly helps your case.
Small Business Applications: Please Don’ts
Some of the points below might sound obvious, but look out for them carefully when you’re making your application.
1. Use the wrong information
It’s a classic of any application advice, but still worth pointing out. Check your application and double-check it before sending it off — especially regarding your financial information. Sometimes, business owners use outdated info, which can either trigger an error or make you look like a less creditworthy borrower (or maybe both).
2. Forget to check your credit score
Technically, there’s no need to check your credit score before you apply since the lender will check it on your behalf. But if you want to avoid getting rejected (which is bad for your score), it’s best to know in advance so you can apply for a suitable loan.
Ideally, check your credit history well in advance of your application so that you can clean it up if necessary and boost your chance of landing a low-interest rate and good loan terms.
You might want to check our popular blog on top tips to improve your credit score.
3. Make big changes in your business
Sometimes, business owners apply for a loan with the hope of using it to fund some massive evolution in their operations. But it’s best not to jump in shortly before making a loan application since this can make loan providers nervous.
They want to see that your company and its finances are stable, so keep your target customers, products, services, and business structure largely the same.
Check out our resourceful guide on Business Loans and finance and thank us later.
4. Wait until you’re in financial trouble to apply
Borrowing often gets a bad reputation, and some business owners are so reluctant to get into debt that they avoid signing up for the loan they need. Or maybe they’re over-optimistic or in denial about how their business is faring and don’t want to face the music by having to apply.
But this leaves them in a precious position if they do eventually decide they want to apply, because a worse financial situation makes it harder to get a loan, and results in worse terms if you do manage to get accepted. This adds more strain to both you as an owner and your business as a whole.
Instead of trying to use a business loan as a defibrillator, apply in good time to boost your chances of success and save yourself the stress.
What type of business financing are you interested in obtaining at this time?
Small Business loans
Don’t take daily payments but still have a monthly turnover over $10k? Our unsecured small business loans are flexible and don’t require assets for security.
Merchant Cash Advance
Got an EFTPOS machine or take daily online payments? A Merchant Cash Advance can give you the quick cash flow you need with flexible payment options based on percentage of future sales.
Now it’s over to you
Applying for a small business loan isn’t rocket science, but there are a few common pitfalls that set many people back and result in a delay or downright rejection of an application that otherwise would have done well. We’ve done our bit by sharing this information, but now it’s over to you to make your application.
If you haven’t applied yet and you’re trying to find the right lender, consider Capify. As a small business specialist, we know how daunting the world of loans can be for you, and we can help to guide you through choosing the right loan type. Sound interesting? Fill in our form today and we’ll get back to you.
