Small Business Lending: 10 Mistakes To Avoid And The Credit Score To Keep

Business Lending For Small Business: Overview And Top 10 Mistakes To Avoid

shaking hands upon successful business lending agreement

These days, it is rare that you find entrepreneurs and small business owners that are able to finance their own operations and projects from the get-go. Thankfully, banks and money lenders are there to make sure your business has enough funding to get off the ground. They offer various business lending options and we’ll be discussing that in this article. 

Borrowing money is no easy task. Although approval rates for business loans are rising, it can still be a hassle to find the best deal for you. Since banks, investors, and loan agencies will all present you different offers, it is important to do your homework before you decide which is best for you.

Today, even if you have bad credit you can be successful in getting a high-interest business loan. While these loans are sometimes necessary if the situation calls for it, we recommend taking every precaution before settling for a loan of this kind. If you are not on guard, you can sometimes fall for a predatory loan that can ruin your business’s chances of success.

Are you ready to apply for a small business loan? In today’s article, we will go through the best business lending tips and tricks while also covering the top mistakes to avoid. By following this guide, you can rest assured that you got the best deal possible to help protect the security and longevity of your small business.

Why Get a Business Loan?

Money in Briefcase for Business Lending

There are many reasons to get a small business loan​. Perhaps you have recently incorporated and need seed funding before you can appeal to institutional investors. Or maybe your business needs an extra inflow of capital to be able to scale your sales operations and take your profits to the next level.

No matter what your reason for getting a loan, it all comes down the basic need for more money. Businesses everywhere rely on banks, loan companies, and investors to provide loans with the expectation that the business can pay them back in full plus interest. While these money lenders provide a valuable service, they can become predatory and harmful if the interest rate is too high.

Far too often we see promising new businesses flounder due to excess debt. Usually, the owners of debt-ruined businesses have no idea how much debt they have accumulated until it is too late. To protect yourself against their fate, follow these business lending rules.

The Top 10 Business Lending Mistakes to Avoid

Ready to take your business to the next level by applying for a small business loan? Below you make any rash decisions, read over this list of the most common business lending mistakes made by entrepreneurs and business owners. Who knows, you might end up saving the fate of your business as a result.

No Strong Business Plan

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One of the most egregious offences that a small business owner can commit is to fail to have a well-designed business plan. It is critically important that businesses looking to attract investors and outside capital write a detailed business plan, so creditors can gain an advanced understanding of your company.

 The more the lender understands your business, the more likely they will be willing to trust it with their money. Plus, a business plan also gives your business a sense of direction and concrete goals to work toward.

Not Dealing with Direct Lenders

Too often we find that business owners want to acquire a loan through a broker. While there is nothing wrong with brokers, however certain less-than-reputable brokers might send your loan application to a long list of lenders in a desperate attempt to secure your loan. As a result, your credit score might be negatively impacted.

Doing DIY Tax Returns

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If you want to run a small business with the expectation of growing it into a large corporation, you need to trust professionals with your taxes. Leaving your taxes to free online applications or software might save you money in the short run, but it will almost definitely cost you further down the road.

Instead, work with a Chartered Professional Accountant to handle all your tax returns. Lenders will always want to make sure you balance your books and your financial reports are accurate, and a CPA will make your books appear much more legitimate and trustworthy.

Not Having Proof of Stability

This one ties into the tip provided above. No matter what, if you want a business loan you need to be able to prove that your company is stable and financially viable in the long run. Just like you need trustworthy tax returns, you also need to make sure your business has a documented and steady income flow over time (ideally several years).

Not Developing Relationships with Your Lenders

Securing a small business loan relies on trust. If you want to charm your lenders and get in their good graces, you will need to develop a working or personal relationship with the bankers or creditors that you want to attract. Be honest, open, and personable with those who you are trying to secure a loan from. This way, they will be more likely to trust your word.

Not Clearing Your Debt(s)

If you are applying for a loan, you should always make sure you settled your existing debt. Outstanding balances not only discourage business lenders from giving you their money, but it also means you will have a harder time paying them back. Before you decide to “stack” your debt, consider paying off your original loan in full. This will also help your credit score.

Not Having Skin in the Game

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When it comes to business lending, you need to show that you have “skin in the game.” In other words, that the owners of the business have their own money invested in the company and therefore have a stake in its financial future. Typically, business lenders like to see the owners of the company put up between 15 and 20 percent on a down payment to quality.

Not Negotiating Enough

It’s a cold, competitive world out there and business owners need to stand up for themselves. If you want to get the best deal possible on your small business loan, you need to be willing to put up a fight and ask for what you deserve. Although many business owners don’t believe they can get away with it, negotiating is the best way to improve the terms of their loan.

If you are looking to acquire your loan through a bank that you have a longstanding relationship with, use that to your advantage during negotiations. After all, they won’t want to see their long-term client move to another bank, will they?

Forgetting to Define the Loan

Every loan application needs to explicitly state the purpose of the loan. If you need a loan to cover your financial statements, pay off existing debts, or fund daily operations, chances are you won’t be approved. Rather, you need to ensure that your loan has a legitimate and clearly defined intention. Only once that purpose is conceived of should you approach a lender.

Not Reading the Fine Print

One of the worst mistakes we catch small business owners making is failing to read and understand the fine print. Every loan or contract includes clearly defined terms and conditions that need to be signed by both parties before the agreement becomes legally binding. Usually these terms are printed in small writing and can include extremely important information.

​We always advise reading through these terms and conditions with a fine-toothed comb. If you have any questions about a clause or statement in the terms, ask the lender about it as well as a trusted professional like a contract attorney. The worst thing you can do as a business owner is sign a contract you don’t understand—or worse, one you haven’t even read.

The Importance of Building Credit for a Business Loan

Man and Money Illustrating Business Lending

All small businesses need to value their credit if they want to be able to secure funding from banks, lenders, or creditors. When it comes to business lending, there are few things more important than building a good credit score.

Usually, they are the first metric that banks look at when deciding to issue you a loan. This is because your credit score reflects how well your business can handle money and repay debts. If your score doesn’t reflect your ability to do those things, you can kiss your chances goodbye.

Business Lending Final Thoughts: How Good Does Your Credit Have to Be? 

​Business credit reports will issue scores between 0 and 100, according to the US Small Business Administration. This score considers many factors such as your credit history and available credit. In most cases, a score of 75 was be sufficient for locking down a small business loan, although the score required will vary according to the size of the loan’s principal.

Author: Jon Stahl

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