Avoiding Mistakes When Getting a Business Loan

Most lenders won’t offer you business financing if your business is new to the market; most of the big players, including the U.S. Small Business Association, expect you to have at least one year of business experience under your belt, and in some cases, two years. If you’ve been in business for less than six months, you may still find a few options. But sticking it out for a full twelve months before applying will boost your odds of receiving the funding you want.

A credit lender will look at your personal credit and your business credit history when deciding whether to offer you a loan. Most long-term loans require a minimum credit score of at least 640. But if your personal credit is on the low side, don’t stress. Credit score is not the only factor a bank or lending company will consider, and if your application is strong in other areas, you’ll be more likely to secure your desired capital. Specific lenders focus on businesses who have a lower business or personal credit score. If that sounds like you, take a look at our top five loan options for business owners with bad credit.

Over two-thirds of business loan applications are rejected². Why? Failing to provide accurate financial data is one of the biggest reasons a bank turns down a business owner’s loan application. As tempting as it may be to lie about your credit score, you’ll be penalized for doing so with a lower loan amount—if the lender gives you any money at all.

Business owners should use a loan application to showcase their ability to repay debt in on time. Include documents like tax returns, bank statements, an outline of your investments and assets, and revenue projections for your company to show you’re financially reliable and can make those monthly payments. Banks and lenders alike will hesitate to partner with you without that proof. Crafting a rock-solid business plan will also help a lender see your potential.

Finding the Goldilocks of loan amounts is a tricky task, but we've got your back. Business.org has found that business owners only receive an average of 42% of the funds they ask for—so don’t be afraid to set your loan request a little higher than the amount of money you actually need. That way, you’re more likely to get the right amount of working capital.

To help you choose the right loan for your business, it pays to know your options. Take a look at our list of loan types to know what to expect.

• U.S. Small Business Association (SBA) loan—This option gives you low interest rates and long terms, but you have to meet pretty strict requirements to qualify.
• Equipment financing—While limited in use, a loan to buy or refurbish equipment can be essential to your operations.
• Merchant cash advance (MCA)—This is a great option if most of your revenue comes through credit card sales. Merchant cash advances give you access to funds upfront, and then you pay back the loan through a percentage deducted from each credit card payment.
• Microloan—If you need a smaller amount of cash (think $50,000 or less), check out this option. Payback time is short, and while interest rates tend to be higher, these loans are also easier to get.

Financial institutions can use pretty strict loan requirements to dictate how you use your funds, and receiving money takes time—that means choosing the right type of loan is critical. For example, if business owners need cash flow fast, an SBA may take too long, so going with a merchant cash advance or invoice factoring may be the quicker process. But if you can stand to wait a little while, opening a new credit card or applying for a traditional (or micro) loan would work better.

Eliminating debt is a great way to boost your credit score, but paying off your loan too quickly has its downsides. Sometimes a lender will fine you if you attempt to pay off your loan early. After all, they don’t want to miss out on valuable interest. And if you’re hoping to secure larger, more long-term loans in the future, use smaller loans as opportunities to prove you can pay off debt consistently, even if it takes a little longer.

Take your time, find the right loan for your situation, and ask for more money than you need to ensure you get the capital to grow your business. Even if you’re worried about personal credit or your business credit score, all is not lost. With some preparation, you can avoid small-business loan mistakes and get the financing your business needs.

Have some tips of your own? Share them with us in the comments!

You’re not alone, and there’s always an opportunity to try again. Take some time to re-familiarize yourself with the different types of loans and lenders to see if there’s a different loan application that may be a better fit. You can use our ultimate guide to small-business loans to find the best option for your company.

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Disclaimer

At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.