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As a business owner, you’re certainly aware that your financial condition may make or break your firm. You don’t need to be reminded that a loan is an investment in the future of your business or that failing on a loan has serious consequences. You should be fully aware of all of these concerns as someone who has the financial acumen to start a business in the first place.
Even the most seasoned small business owners may have difficulty qualifying for an SBA loan, such as the SBA 7(a) loan, which is gaining popularity. This is especially true for entrepreneurs who aren’t acquainted with the process of commercial finance. If you’ve been bootstrapping your business, you may be nervous about (but excited about) the prospect of borrowing money to grow.
We wanted to hear from commercial loan officers about the most common mistakes they see business owners make when applying for a loan, so we polled a few lenders, and the results were surprising.
The following are the most typical mistakes small businesses make when applying for an SBA loan.
The most typical error is failing to give an itemized list of collateral (or refusing to supply one).
“Bankers aren’t ventured capitalists or angel investors.” “We’re lenders,” explains company loan officer David Vernich. ‘With depositors’ money, we must take safe, prudent risks to guarantee that we receive it all back plus interest.’
Is there a way to get on your potential lender’s good side? Make a thorough list of all the assets you’re willing to use as collateral for your loan. Although the SBA provides a guarantee, it is not for the whole loan amount, so the bank is still taking a risk by giving you money. Demonstrating that you have assets you’re willing and able to utilize as collateral, as well as being completely upfront about their worth, is the easiest way to calm this worry.
While some borrowers may be able to get away with it without submitting this list, SBA loan expert Sameer Shah cautions against it. “I’ve seen examples where the corporation or the guarantors neglected to report or hide certain assets. While they can typically get away with it, it’s unethical and might be a significant issue if they default.”
The second error is not understanding how much money you need.
It’s tempting to ask for as much money as possible. After all, if you have more money, you can do more for your firm, right?
Perhaps, but setting your growth goals first and then calculating how much money you’ll need to get there is a lot better approach. This will not only save you from getting into too much debt, but it will also make you seem good to a loan officer when you meet with them.
If you’ve carefully planned how you’ll spend your loan money, the lender will notice that you’re organized and responsible, making you a lot safer risk than Joe Schmo who just wants to see how much money he can get.
Mistake #3: Not having sufficient funds to repay the debt (or not being able to prove it).
Your books are your most strong weapon when it comes to qualifying for an SBA loan. “We need $1.25 in cash flow from the corporation to pay back every dollar of debt,” Vernich says.
Have all of the following if at all possible:
-Returns over the last three years (business and personal)
-For the current year, a full personal financial statement
-Proof of cash flow or credible estimates
“If you have all of these attributes, your chances of success rise ten-fold,” says Vernich.
Mistake #4: Failure to put up a ten percent down payment.
Although a down payment isn’t usually required, Kensley Lewis, secretary and loan officer at Commercial Loan Solutions, suggests having 10% of the loan amount on hand just in case.
Mistake #5: Failing to clean up your credit record as soon as possible.
“A booming firm can not balance a bad personal or business credit score,” says Nicholas Straut of Fundera, a big SBA lender based in New York. And, if your credit is in good shape, now is not the time to take on more debt. If you have other debt or credit commitments and your income isn’t enough to support them, you’ll have a hard time getting a loan. “Be honest, thorough in your planning, and practical!” Strauss claims that.
Anything you can do to show your potential lender that you’re serious about repaying your SBA loan would be beneficial. According to Paul Jennifer, a Merchant Cash Advance expert, “the first thing small businesses should recognize is that the first thing they should give is numbers.”
So, what’s the gist of it? It doesn’t matter if your idea is worth a million dollars; lenders are just interested in the cash.