Looking for a Loan? Avoid These 4 Common Pitfalls
By Margot Carmichael Lester, Staples® Contributing Writer
If youre considering a loan for your small business or start-up, youve probably already got a list of to-dos you need to accomplish before talking to a lender. To make things a little easier, we compiled this short list of pitfalls: four things you should definitely not do if you want to improve your chances of getting a loan.
Pitfall #1: Be unclear on (or unsure of) use of funds. One of the surest ways to get rejected for a loan is a nebulous use of funds. Have clearly outlined goals for what the financing will achieve for your business, says Jessica Mah, CEO and co-founder of San Franciscobased inDinero.com, developer of payroll, accounting and tax management services as a software. At first, I wanted to raise money for the sake of hiring or expanding the business, but those aren't goals at all. Now I have firm revenue and customer targets for what the additional financing will help us achieve. I know exactly who I'm going to hire on what kind of timeframe 3, 6, 12, 18 or 24 months ahead of time.
Action Item: Develop a detailed description of how the money will be used, including data that supports it.
Pitfall #2: Over-emphasize the business plan. Lots of lenders want to see a business plan, but many small business owners and entrepreneurs spend too much time preparing it, says Wes Pope, senior vice president and commercial banking officer for First South Bank in Durham, NC. Banks dont need a 40-page business plan. Lenders really want to know that the business is on top of its finances and has laid out a road map for itself. Income statements, P&Ls and balance sheets are useful, but do not tell the whole story. Cash budgets, capital budgets, and sources and uses statements paint a much clearer picture.
Action Item: Work with your accountant or bookkeeper to tell the full story of your financial situation, in addition to that business plan or lean start-up canvas.
Pitfall #3: Seek the wrong solution. There are more options out there than you realize, says Mike Glanz, CEO of HireAHelper in Oceanside, CA, which connects local moving laborers with people needing extra hands. We didn't know where to go to get the answers. We banged our head against the wall trying to get SBA or personal loans for the business and just couldn't get approved. Invest time in learning about lending, such as the best type of loans suitable for your business stage and other forms of funding. Your chances of getting approved increase when you approach the right lender for the right loan.
Action Item: Talk to your connections and take advantage of services like Staples Business Loans that make it easy to explore your funding options.
Pitfall #4: Neglect key documentation. Any reputable lender expects a fair amount of documentation to verify your reliability as a loan recipient, so insufficient information increases the chances of rejection. Jacob Aune, co-owner of Altare Design, LLC, a custom woodworking business in Aroma Park, IL, took out a loan to buy a building for the shop and was stymied by the amount of paperwork, records and time required. Find out ahead of time what documents are required and get them in order before starting the loan process. Otherwise, expect to wait a week between each request for an additional piece of information. IRS tax transcripts can take a long time to arrive, so get the request in right away. We didn't, and lost a month of time waiting for them to show up.
Action Item: Use this small business loan checklist to get a jump on the documentation you need.
Now that you know the common pitfalls that can lead to rejection, you can improve your chances of getting the loan you need to sustain or grow your business.