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Do's and Don'ts for Small Business Loans

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As your business grows, you may find that you could use a loan to take advantage of new opportunities. The world of small business loans can be complicated to navigate. So we gathered expert advice on everything from building your credit worthiness to finding the right lender. Here are some good practices and common mistakes to avoid.

To obtain a small business loan

Get a separate bank account

Any lender who plans to transfer a loan to your company must first control your finances. The easiest way to do this is to have a separate account and books for your business.

Gerri Detweiler, director of education for the Nav business credit market, said in a phone interview with Small Business Trends, "The results of the annual Business Banking Nav survey reflect the following: importance of business checking accounts We surveyed 648 business owners from all over the United States and found that 70% of small business owners without business checking accounts were denied for a commercial loan in the last two years. "

Know your credit scores

According to Nav's Small Business American Dream Gap survey, small business owners who understand the results of their business credit are 41% more likely to be approved when they apply for a commercial loan. Your personal credit score can also have an impact because it shows lenders your financial health and habits when it comes to paying off loans or lines of credit. Check these scores and work to improve them if they do not meet the minimum requirements.

Detweiler adds, "Make sure you know your personal credit score and your credit score. We have about 30 different types of lenders in our market, and a good number of them have a minimum personal credit score of around 550, and some are around the mid-600s or so. "

Look in all your options

Lenders are not lacking. Shop online and compare rates and options before committing yourself. You can even look into alternative loan options like Kiva.

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Detweiler says, "Often what happens is that borrowers end up with the options that are best sold to them rather than the best option for them. So you have to be willing to spend some time reviewing the different options and finding the best solution for you. "

Gather all the necessary documentation

There are several important documents you will need to apply for a loan, from your tax returns to the history of your loans. Be sure to carefully consider what is needed for each loan you request and gather all the essentials in advance.

Using a commercial loan calculator

Some lenders will not share the actual cost of the loan with you when you apply. So, to make sure that you can actually afford to pay off a loan, Detweiler suggests hooking up the APR, interest rate and other associated costs in a business loan calculator like Nav & # 39; s. This can give you at least a general idea of ​​the actual cost and help you determine if a particular loan is right for you.

Learn from your mistakes

According to the Nav survey, 45% of small business owners who are denied funding are denied more than once and 23% do not know why their applications were denied. So, if you are turned down for a loan, see if you can get feedback from the lender on how you can improve the situation, or ask another professional to review your request for suggestions.

Seeking expert advice

There is no rule that says you must apply for a loan completely by yourself. So why not take advantage of the resources available to you?

Robert Harrow, Head of Credit and Loans at ValuePenguin, said in a phone interview with Small Business Trends: "There are SBA offices in the United States that are leading initiatives to educate businesses on topics such as building businesses. 39, a business plan ready. They will even set you up with mentors who can provide you with the necessary advice to get a loan. "

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Don'ts to Get a Small Business Loan

Having assets given as security to other creditors

Lenders do not just give credit for a generic digital score. They are also often on the lookout for specific problems that make you a less attractive candidate.

Detweiler says, "Often lenders are really looking for red flags that could be disqualifying for the company."

Being guilty of payments

Detweiler says late payments can lead to other alarm signals that will drive away lenders. It does not only hurt your credit score, but it can also lead to taxes and property that can greatly hinder your chances of getting approval.

Do not know how long you have been in business

One of the first things that lenders consider when you determine your credit worthiness is the duration of your business. Even if you probably know how long you have been working on your business, some companies do not have any documentation to back it up.

Detweiler says, "This sounds obvious, but some companies do not have an official start date because they started slowly or started working on their business and waited a while before they started. to be constituted. So make sure you have at least an approximate start date and have some kind of documentation to back it up. "

Apply only to the local bank

Detweiler explains, "Many businesses have this dream when they are going to get a loan, they just go to the local bank and they get the money they need with a good rate of $ 100. interest and good terms of repayment. And if you can get it, it's awesome. But a local bank may not be interested in lending $ 50,000 or what you need for your small business. And many entrepreneurs do not realize the number of different lenders and the number of different loans. "

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Be vague about what you want

In your credit application, lenders will ask how much money you want and what you plan on using it. Being open about one or the other of these elements can give them a lack of confidence about your projects.

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Harrow says: "I recently spoke with the NYC SBA and they said that the most common pitfall for the reasons why businesses are being denied is that they do not have a business. Do not have a good idea of ​​what funds will be used or how much they actually need.Lenders want to see that you have a specific plan in place. "

Wasteful time applying with lenders who do not work in your industry

In your credit report, you should find an industry code that describes your business. Some lenders lend only to specific industries, and others may only have a few that they will not lend based on the risks involved. So be sure to check these items before you spend time applying.

Detweiler says, "Some lenders do not want to lend to real estate companies, for example, because it can be very difficult."

Borrowing Doubtful Lenders

While it's a good idea to broaden your search to non-traditional lenders, it's also important to look into the history and reputation of any company with which you intend to to work.

Harrow explains, "Sometimes when you broaden your search, you come across companies that are simply looking to make money quickly but are not interested in helping you at all."

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