Top Business Loans Application Mistakes and How to Prevent Them

As an entrepreneur, securing small business loans can be a pivotal step in growing and sustaining your business. However, the application process can be daunting, especially if you’re not fully prepared. In this article, we will cover everything you need to know about applying for small business loans, including common mistakes, how to avoid them, what underwriters (UWs) look for when reviewing your bank statements and understanding your loan purpose and amount. With these details, you can enhance your chances of making informed decisions and securing the right funding for your business.

Common Mistakes When Applying for Business Loans

1. Neglecting Bank Statements

Bank statements are a crucial component in the loan approval process. However, many entrepreneurs often glance at a bank statement briefly or place the bank statement aside for later, only to address issues when they arise. UWs utilize your bank statements to assess your financial health and money management practices throughout the loan evaluation and approval process.

Here are a few key areas UWs focus on: 

• Summary Page: A quick overview of your account’s financial activity.
• Each Transaction: A review of individual transactions to understand spending patterns and income sources.
• Red Flags: Overdraft fees, insufficient funds, and negative balances, which suggest poor money management.
• Bank Fees: Excessive fees may indicate that you’re not paying attention to your finances or not managing your account efficiently.
• Money Management Practices: UWs assess whether you’re paying your bills on time, maintaining a consistent cash flow, and making strategic investments.

Regularly reviewing your bank statements provides a clear picture of your financial health, ensuring that income and expenses are tracked and negative balances are avoided. Thoroughly review your bank statements each month and know when your bank statement closes. This proactive approach will help you identify any discrepancies, avoid surprises, and manage your funds more effectively.

To learn more, watch the GNEC Fund Ready Podcast Short Understanding Bank Statements When Applying for a Loan on YouTube

2. Lack of Business Loan Preparation

Paperwork is another essential component of the loan application process. Having the necessary paperwork prepared and ready will help facilitate a smoother loan process. Here are a few examples of the type of paperwork UWs require during the loan application process:

• 2-3 years of tax returns 
• Pay stubs
• Bank Statements
• Business certificate and formation documents
• Business Plan
• Resume
• Personal financial statement
• Proof of Address

Ensure all paperwork is available, organized, and labeled correctly. Lack of preparation can delay the process of getting your small business funded.

To learn more, watch the GNEC Fund Ready Podcast Short Common Mistakes When Applying for a Loan from an Underwriter’s Perspective on YouTube.

It’s also common to underestimate the importance of knowing exactly how much funding you need and how you plan to use it. 

When preparing for a loan application, it’s essential to outline:

• Amount Needed: Clearly define how much funding you need.
• Purpose of the Loan: Explain what the loan will finance, such as equipment, inventory, or business expansion.
• Benefits to the Business: Detail how the loan will benefit your business, including expected ROI and how it will impact cash flow.
• Repayment Plan: Outline how you plan to repay the loan and how it will help your business grow and build credit history.

Be prepared to articulate this clearly to the lender in preparation for your loan application.

To learn more, watch the GNEC Fund Ready Podcast Short Understanding Understanding Your Loan Purpose and Amount on YouTube 

3. Not Comparing Loan Options

Understanding your options and shopping around to compare different loan options is important to determine the best option for your business. Research and compare options. Know the difference between a loan vs line of credit.

A loan is ideal for purchasing equipment, investing in marketing, or making significant business improvements, whereas a line of credit works like a credit card, allowing for flexible borrowing and repayment, ideal for short-term needs or ongoing operational costs.

Be sure to research various lenders and loan products to ensure you secure the best rates and most favorable terms to position you in the best financial state to expand and sustain a successful business.

At Greater Newark Enterprises Corporation (GNEC), we’re happy to assist you with the tools and resources to support you throughout your entrepreneurial journey. 

Additional resources are available to assist you throughout the loan application process. 

Small Business Administration: sba.gov

GNEC Loan and Fund Programs: https://www.gnec.org/business-loan-services/

GNEC Resources: https://www.gnec.org/about-us/resources/

Frequently Asked Questions: https://www.gnec.org/faqs/