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Author: Ravi Philemon
If you avoid common small business loan mistakes you may maximise the success of the business proposal you are presenting to the bank
By: Hitesh Khan/
It is likely that a loan application from a small business, with only a limited amount of security might be viewed with caution by the bank. However, there are steps you can take to maximise the success of the business proposal you are presenting to the bank, and these include:
Among the most common small business loan mistakes is asking for more money than your business require.
Don’t Ask For More than You Need Banks use a variety of formulas to work out how much they think you can afford to borrow. So it makes sense that you do not ask for more than you need to borrow, because the more that you request, the harder it will be to prove to the bank that you can afford to repay. It is also important not to underestimate what you need. If you do underestimate, you may need to go back to the bank to ask for more money.
One of the most common small business loan mistakes entrepreneurs make is to rush their application.
Each bank will have different loan approval processes. The first bank officer or loan specialist you talk to may not be the person who makes the final decision on your loan. It depends on the size of the loan you want, the size of the bank and the systems the bank has in place for loan approvals.
You are certainly entitled to ask how long the process might take, but avoid placing any pressure on the bank to respond. This will not hasten the process and may give the bank officer reason to be more cautious. This initial person may have to present your application to a larger group for approval, so you need this person to be
on your side, have all the information they need and a good understanding of what you want to do with the loan.
Common small business loan mistakes which may affect your application process:
- Thinking that business turnover (cash flow) reflects their actual profits. Banks look at net profits rather than cash flow.
- Not providing information about the directors of the small business. Banks will assess directors and may ask for guarantees from directors, depending on the individual circumstances of the business.
- For micro enterprises – thinking that business assets can be used toward security. While this can be considered for some business customers and corporate segments (if used as additional security rather than sole security), it is not acceptable by banks from the micro business segment.
- Inflating the value of business assets. Bank valuations assess standard market value for a quick sale therefore many small businesses overstate the true market value of their assets
Presenting your business in the best light
A business plan and impressive financials probably will not be enough to secure you a loan. At some point in the process you will have a face-to-face meeting with the bank to discuss the loan application and possibly more than one meeting.
What the bank needs to find out at these meetings is whether or not you fully understand the implications of taking out the loan you are asking for. The bank will be testing to see if you really know your business, and the need for financing, as well as you say you do.
The bank will take into consideration the competitive position of your business within your industry and location, your enthusiasm for the project and your dedication to your business, but in the end, the bank wants to find out just how successful you are likely to be, and how likely it is that they will profit from your business success.
Most importantly, to avoid most common small business loan mistakes, be sensible about the amount you actually need to borrow and be able to justify it. Take your time preparing the application and don’t hurry the bank to make a decision. A well prepared business proposition is a good sign of a borrowers commitment to a prospective lender. Providing any additional information requested by your bank, will assist in the bank making a risk assessment of the business and decide whether to grant the loan.
How to Secure Small Business Loan Quickly
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