Mistakes to Avoid When Applying for a Business Loan
Written by: Rebecca Game
Whether it's a business loan or a personal loan, there are
several common loan application mistakes that many businesses
and individuals often make when applying for a loan. Avoiding
loan application mistakes is your most valuable tool in being
approved on a loan. The following common loan application
mistakes can interfere with loan approval.
1. Being unaware of your credit rating.
Before even attempting to get a loan, know where you stand.
Request copies of your credit reports from Experian, Equifax,
and Transunion, which are the three major credit reporting
agencies. Your reports will show whether or not you've made your
payments on time, or if you've defaulted on a loan, declared
bankruptcy, or had any other financial problems. Additionally,
it will show positive items, such as when you've paid your bills
one time, or when you've paid a loan in full. Consistently
paying your bills as scheduled shows that you're worthy of a
loan, and is very attractive to a lender. If your credit has
undesirable listings, be aware of them, and be prepared to
explain them to the lender.
2. Not understanding the loan terms before signing.
Avoid the most common loan application mistake, and make sure
that you read and fully understand everything involved with the
loan before signing. Not only should you take the time to read
the fine print in its entirety, but you should also ask
questions about anything and everything that you don't fully
understand. This is a common loan mistake because individuals
are often so anxious to get the loan that they fail to pay
attention to the details. Don't assume that the terms on this
loan are the same as for "any other loan." Know what you are
signing before you sign.
3. Continuously searching for a lower interest rate.
Interest rates change often. If you feel you've found a great
rate, lock in before the rate increases to avoid this loan
application mistake. People quite often make the loan
application mistake of getting greedy, opting to see if rates
will drop even farther before locking in on that rate. This loan
application mistake of continuing to search for an even lower
rate often works against you, rather than in your favor,
especially if you have to wait longer to obtain the loan that
you perhaps need immediately, or worse, if the interest rates
actually increase rather than drop.
4. Not explaining the details for needing the loan.
Yet another common loan application mistake of not fully
explaining how the loan will be used. For example, if the loan
is to be used for business purposes, explain the details of how
you will use the money. Lenders want to see that you know
exactly how you will use the money, and how this loan will meet
5. Make major loan application changes.
Show the potential lender that you are stable and can make solid
decisions. Don't apply for a business loan, for instance, and
submit a loan proposal, only to call the lender a while later
and tell them that you've reconsidered and plan on using the
money differently than stated in your paperwork. Make your
decisions prior to this, and don't make this loan application
mistake of being unsure when you apply. Submit your proposal
only in the event that you are 100 percent sure of your actions
and will not change your mind.
6. Apply only to the most convenient lender.
While heading to the bank in which you do business with is an
obvious reaction, avoid the loan application mistake of not
shopping around with other lenders. Check into obtaining a loan
with a credit union, and if you're searching for a small
business loan, consider investigating programs offered through
the Small Business Administration. This loan application mistake
is also easily corrected by making just a few phone calls to
lenders' check rates and offers.
7. Not having current finances in order.
Whether you're in need of a personal loan or a business loan,
don't apply for a loan without proper financial documentation
for the lender. This loan application mistake can either delay
the loan process, or cause the lender to immediately turn you
8. Failing to have equity.
Especially for a business loan or a home loan, having some
equity, such as a down payment, can significantly increase your
changes of securing a loan. While this loan application mistake
is sometimes unavoidable, be aware that lenders are not as
enthusiastic to offer loans to those without equity, especially
loans for large amounts or for individuals with less than
desirable credit scores.
9. Having no collateral.
As with equity, no collateral gives no assurance to the lender
that the loan will be repaid. Having collateral increase your
chances of having the loan approved.
10. Not having a business plan if the loan is for business.
Not having a business plan in place, or employing a poor
business plan, is an inexcusable loan application mistake, yet
can be easily corrected. If you're starting a business, or wish
to obtain funding to expand on an existing business, you need to
demonstrate to the lender how the business will operate and make
money. A business plan is essential for a lender to see your
goals and see how you plan to reach those goals.
11. Not avoiding hidden loan costs.
Avoid signing a loan that requires hidden costs. This loan
application mistake might include fine print stating that annual
fees, bank charges, closing costs, commissions, and balloon
payments are required. Be informed, and don't sign anything
without being completely sure what it means.
About the author:
Rebecca Game is the founder of Digital Women ®, an online
community for women in business. A 30 year entrepreneur and
dedicated to helping other women find small business loans.
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