10 Mistakes to Avoid When Trying to Get a Business Loan

Securing a business loan is a big step.

Whether you're launching a startup, expanding with commercial real estate, or financing new equipment, the right loan can provide the funds needed to reach your business goals.

But getting approved isn’t always simple, and common business loan mistakes can slow down or even derail the process. To improve your chances of approval and secure better loan terms, it’s important to avoid key missteps.

In this article, we’ve listed 10 mistakes to avoid while applying for your loan as well as business loan tips and advice.

1. Not Checking Your Credit Score

Before applying for a business loan, review both your personal and business credit scores as they play a major role in determining approval and interest rates.

There’s no universal minimum required credit score to secure a business loan, but most banks and lenders prefer credit scores in the mid to high 600s. You can check your credit score through services like Experian, Equifax, and Transunion.

If you need to improve your credit score before applying for a business loan, here are some tips to help:

Build business credit by using a business credit card;
Pay off any outstanding debts and avoid late payments;
Dispute any errors on your credit report that lower your credit score;
Diversify your credit accounts to strengthen your profile

2. Applying for the Wrong Type of Loan

There are plenty of different types of loans you can apply for, such as Small Business Administration (SBA) loans, term loans, lines of credit, and merchant cash advances. Do some research to see what the requirements are for each and which option is best suited for your business.

Consider your business’s financial needs and what the loan will be used for. Do you need short-term cash flow support or a long-term investment loan? Or do you need capital to buy equipment or expand your business?

Since applying for the wrong loan can lead to rejection or unfavorable terms, answering questions like these will help you make sure you’re applying for the right loan from the start.

3. Failing to Prepare Proper Financial Documents

Missing or inaccurate documentation in a business loan application can lead to delays or outright rejection.

The exact documentation you’ll need to submit along with your business loan application varies from lender to lender, depending on whether it’s a bank, credit union, or SBA preferred lender. Check the lender’s specific requirements to find out what they need. In addition to financial documents, some banks and lenders may also request a business plan.

Generally speaking, however, lenders need a clear picture of your business’s financial health before approving a loan. It’s wise to keep documents like financial records, tax returns, balance sheets, and profit and loss statements updated and organized. You may even consider working with an accountant to make sure your financial documents are all accurate and aid in business bookkeeping.

4. Ignoring Debt-to-Income Ratio

Your debt-to-income (DTI) ratio compares your monthly debt payments to your income. A high DTI signals risk to lenders and can lead to denial or high-interest rates.

Before applying for your loan make sure to calculate your DTI (there are many DTI calculators available that can help with this), and consider paying off small debts, as well as looking for ways to increase your revenue.

5. Not Having a Clear Business Plan

Lenders want to see that you have a solid plan for using the loan you’re requesting and a realistic strategy for repayment.

Put together a well-structured business plan that includes the following:

Financial Projections: Outline expected revenue, expenses, and profits over a set period. Lenders want to see realistic, data-driven forecasts that demonstrate your ability to repay the loan. A key aspect of financial projects is understanding how different business structures impact your taxes as well as the different tax implications your business should pay attention to.
Revenue Model: Explain how your business makes money. Detail your pricing structure, customer acquisition strategy, and any recurring revenue streams that provide financial stability.
Growth Strategy: Describe your plans for scaling the business. This can include expanding to new markets, launching new products or services, or increasing operational efficiency to drive profitability.

Finally, make sure your business plan is concise but detailed enough to make lenders confident in their decision.

6. Applying to Too Many Lenders at Once

Submitting multiple loan applications in a short period can trigger multiple hard credit inquiries, which may lower your credit score and raise red flags for lenders.

Instead of applying to multiple lenders, do research beforehand to find the best fit to apply for and only apply to lenders that match your business needs and qualifications. You may also want to consider prequalification options that don’t impact your credit score.

7. Overlooking Loan Terms and Hidden Fees

It might be tempting to only consider interest rates when shopping for loans, but there are other terms that you need to consider. When reviewing loans, keep in mind things like:

Repayment Schedules: The structured timeline outlining when and how a borrower must repay the loan, typically in fixed installments (monthly, quarterly, or annually).
Repayment Fees: Charges incurred for making payments under specific conditions, such as late payments, early repayment, or adjustments to the agreed schedule.
Origination Fees: A one-time fee charged by lenders to process a new loan application, often calculated as a percentage of the total loan amount.
Prepayment Penalties: Fees imposed when a borrower pays off a loan before the agreed-upon term, compensating the lender for lost interest revenue.
Variable Rate: An interest rate that fluctuates over time based on market conditions or a benchmark rate, potentially increasing or decreasing a borrower's repayment amount.

Make sure you understand the total cost of the loan, including how interest accrues and any conditions for early repayment. If you need clarification on any unclear terms, ask the lender – you don’t want any unexpected surprises down the road.

8. Underestimating Cash Flow Requirements

Lenders assess your business’s cash flow to ensure you can manage loan repayments. Poor cash flow can result in a rejected application or stricter loan terms, making it harder for your business to thrive. To improve your standing, maintain detailed cash flow statements and forecast future needs, including seasonal fluctuations or unexpected expenses. Building up a cash reserve can demonstrate financial stability and cutting unnecessary expenses while optimizing revenue collection will help keep your cash flow healthy.

For additional help, check out our end-of-year small business tax tips to better manage business financial planning and cash flow.

9. Misrepresenting Business or Financial Information

Providing inaccurate or misleading information on a loan application can have severe consequences, including:

Loan Denial: Inaccurate information can lead to an immediate denial of the loan application. Lenders rely on accurate information to assess your creditworthiness and ability to repay the loan. Any discrepancies or inconsistencies can raise red flags and result in a rejection.
Legal Action: Knowingly providing false information on a loan application is considered fraud and can lead to criminal charges. This can result in fines, imprisonment, and damage to the borrower's reputation.
Damage to Credit Score: Inaccurate information can negatively impact your credit score. If the lender reports the discrepancies to credit bureaus, it can lower the borrower's creditworthiness and make it difficult to obtain future loans or credit.
Loan Default: If inaccurate information leads to a loan approval and you are unable to repay the loan, it can result in default. This can have severe financial consequences, including foreclosure, repossession, and wage garnishment.

Remember, honesty and accuracy are essential when applying for business loans. Double-check all details before submitting your application and be transparent about your financial situation, including any existing debt obligations. If your business has financial challenges, prepare a reasonable explanation along with a plan to address them.

10. Not Seeking Professional Advice

Navigating the loan process can be complex. Financial professionals like accountants, loan brokers, and business advisors can help you identify the right loan type, strengthen your application, and negotiate better terms, improving your loan eligibility and financial stability.

You can also leverage resources from small business associations and financial institutions. Before signing a loan term, consider working with an attorney to review the terms and ensure you fully understand your obligations.

If you're a new entrepreneur, navigating business taxes can be complex. If you need some guidance, check out our article, Navigating Business Taxes: Tips for New Entrepreneurs.

Secure Your Business Loan

Understanding the loan application process, choosing the right financing option, and preparing your financial documents can significantly improve your chances of securing a business loan with favorable terms. Meanwhile, avoiding common mistakes can help you stay financially stable and ready for growth. If you’re unsure about your eligibility or need guidance on strengthening your application, working with a financial professional can make a big difference.

At Chatterton & Associates, our team specializes in helping business owners navigate the loan process and secure the right financing for their needs. Schedule a free consultation today to get expert insights and set your business up for success.