Even if you have an idea that can change the world, there comes a time when you need money for that idea to come to life. This is when most entrepreneurs decide to take a business loan and try their luck. After all, who dares, wins.
And as the approval rates for loans are steadily increasing, more and more business owners choose to take this step in order to get an infusion of capital and get their business off the ground.
However, even though now it is easier to take out a loan than ever before, it is important to be aware of some common mistakes and avoid them. That is how you will reduce the risk to a minimum and improve your chances of qualifying for a loan.
Here are the five most common mistakes that young entrepreneurs should avoid when they are applying for a business loan.
1. Not knowing your credit score.
When was the last time you checked your business credit score? You probably know your personal credit score, which can be helpful when applying for a business loan. But your business credit score also plays a very important role.
That is why you need to check your business credit score before you apply for a loan. Luckily, it is rather easy to do it ‒ to get a free copy of your credit score at one of the major credit bureaus (Experian, Equifax and TransUnion), you only need to show them your employer identification number
Then, if you are not happy with what you see, you need to take some steps in order to increase your score, which, in turn, will improve your chances of getting a better loan. Some things you could do is reduce debt, pay bills on time and have vendors and suppliers report positive history.
Even if you have bad credit, there are many ways to get a business loan with bad credit. However, it is always better to improve your credit score first and then apply for a loan because you will get a much better deal this way.
2. Rushing into it.
In spite of the fact that the lending market is becoming more flexible, there are a number of lenders that offer loan terms that are far from favorable. Always take some time to read all loan terms carefully and never hesitate to ask for clarification if you don’t understand something.
Knowing the actual APR on the loan, paying attention to hidden fees, staying away from predatory loans ‒ all these are things that you need to check before signing your name on the contract. Because once you sign, there is no way back.
Also, if you decide to apply for loans online, you need to know how to protect your personal information online. This means that you should beware of scam websites, use encryption software, protect your passwords and be careful on social media.
Finally, you definitely don’t want to share your Social Security number with everyone, so make sure the lender is completely legit before providing them with your sensitive information.
3. Having no collateral.
One of the most common reasons why banks deny loans to small businesses is lack of collateral. If you want to be sure that you will get a business loan, you need to think about your potential collateral.
Lenders want to be certain that you will repay the entire loan, so they will ask you to provide a second source of repayment in case your business fails to generate enough cash flow. Why should they give you money if you are not ready to put up your own money in the first place?
Luckily, lenders will accept different types of collateral like cash, real estate holdings, equipment and so on. When it comes to business loans, collaterals are usually necessary. That is why you have to think carefully about what could serve as collateral before applying for a loan.
4. Not explaining the loan purpose.
When you are applying for a business loan, you need to indicate how you will spend the money. This is necessary because lenders want to see that you know precisely what your business needs are and how the loan will help you meet those needs. In other words, the company that lends you money wants to be sure that you will use the money to grow your business and earn enough to pay back the loan.
Make sure that you know all restrictions as to how the money can be used and research all details before applying. When filling out the application, write in detail what you are going to spend the money on.
5. Not borrowing enough money.
How many times in your life have you spent the exact amount of money that you had anticipated to be enough? This happens very rarely, almost never. You will most often need more money than you initially think you need because unexpected costs always arise.
That is why your business plan should indicate a good idea of how much money you will need. If you are running a startup, a rule-of-thumb advice is that you should ask for enough money to keep your business going for the first six months.
The last thing you want to do is have to talk to your lender again because you underestimated your costs. So, be wise and always ask for more money than you think you will need.
Bottom Line.
Taking out a business loan is not as difficult as it used to be. With the number of startups only increasing, lenders are smart enough to see a great opportunity to grow their businesses by helping young entrepreneurs cover their business costs.
If you follow the tips we listed, you will stand much better chances of taking out an affordable loan. When you avoid these five common mistakes, you will be able to find a loan that will cover all the costs that you planned as well as those that you could not anticipate.
