Financing is a vital component for many small businesses, and small business loans are one of the primary methods you have for obtaining it. The process of applying for a small business loan involves some specificity and detail, and there are a few errors or mistakes you want to steer clear of as you’re navigating this.
At Michigan Certified Development Corporation, we’re happy to help with a variety of areas while assisting our clients in obtaining a small business loan, including SBA 7(a) and 504 loans. What are some of the most common mistakes we see from those applying for these loans, and how do you avoid them during this vital process? This two-part blog series will go over everything you need to know.
Failure to Develop a Detailed Business Plan
Lenders want a comprehensive understanding of your business and how you make money when they’re considering your small business loan application, and without a solid business plan, they won’t have that. When writing your business plan, it’s important to note that it should be tailored toward the type of loan you’re applying for. Will your financing be based on real estate? Equipment? Inventory? Inventory or inventory-based loans will require a different set of projections and expectations than other small business loans.
Your business plan should also include financial projections that allow a lender to measure your ability to repay the loan. It’s important that your projections are as accurate and conservative as possible – try making a list of potential expenses and then subtracting that from the income you expect to generate. If the amount you end up with is too big or too small, adjust accordingly.
Poor Business Credit
Just like a personal or mortgage loan, credit will play a role in the outcome of your small business loan application. Potential lenders will want to know about your past credit history and what you have done to manage it, as they’ll inevitably pull your report before making any decisions. Typically speaking, banks and other financial institutions will be looking for a minimum score equal to or above 620.
Applying for the Wrong Type of Financing
There are multiple sources of finance available to your business, and it’s important to know which one you’re targeting before you start submitting applications. Will your small business loan be based on long-term assets such as equipment or inventory? Or is the financing going to be short term, revolving around things like accounts receivable and lines of credit? Knowing how much cash you’ll need and what kind of collateral is necessary will ensure that your application hits all the right points with your lender.
For more on avoiding mistakes while submitting a small business loan application, or to learn about any of our SBA loan options or other services, speak to the staff at Michigan Certified Development Corporation today.