There are a lot of reasons your company might want a business loan. You may want to capitalize on a humming economy and invest in your infrastructure. Your industry may be struggling, and borrowing money may be a way to keep things afloat. If a natural disaster has hurt your business, you might need a small-business disaster loan.
Whatever your reasons for wanting or needing an infusion of cash, know this: Even established companies with healthy credit can be turned down for a business loan. And even seasoned business owners can make errors or bad decisions when sending in an application.
So if you're applying for a business loan, keep the following in mind.
1. Ask for the business loan as early as possible.
Yes, there are a lot of financial institutions that will lend you money in record time. That said, you won't regret being organized and having more time than you need when it comes to requesting a loan.
“Timing is a factor," says Barbara Vrancik, a business financial consultant in New York City. “Banks are reluctant to lend when a business is facing a liquidity problem or is desperate for a cash infusion, even if they are profitable.
"If a lender does lend under those circumstances," she continues, "the cost of that financing will be high."
She recommends borrowing money when you don't need it, which, yes, sounds counterintuitive. Still, if your projections are solid and have a track of record of being accurate, you'll probably know when in the coming year you're going to need money and when you won't.
“Apply for financing when your financial results are the strongest in the business cycle," she says.
2. Get your facts straight.
Sounds obvious and easy enough to do, but business owners make mistakes on their loan applications pretty frequently, says Max Tirey, a finance associate with LeaseQ, an online marketplace for equipment financing.
—Jerry Ross, president and CEO, National Entrepreneur Center
One mistake a lot of small-business owners make is getting the name of their own company right.
“Put the full legal name," Tirey says. If your company's legal name is Bob's Auto Repair LLC, put that—don't put whatever is on the sign or the website, like, “Bob's Auto Repair." If you often shorten your name and refer to your company as “Bob's Auto," well, don't put that down either.
Another common blunder, according to Tirey? Not listing all of the owners' names on the application. Sometimes companies will leave off an owner who has bad credit.
“Between secretary of state filings and business credit reports, the finance company will discover all owners and will ask for them to sign the application," Tirey says.
By leaving someone off, he adds, you're either slowing down the process or possibly changing the terms of the agreement once that missing owner winds up on the application form.
Misrepresenting your company's age is another common mistake.
“If Bob has been a mechanic for 10 years, but Bob's Auto Repair LLC has only been in business for five years, the time in business is 5 years—even if he ran Bob's Car Shop Inc. for five years before Bob's Auto Repair LLC was founded," Tirey says.
3. Be truthful.
How is this different than getting your facts straight? Some mistakes, like not putting your company's legal name, is something a lender may forgive. Other errors are less forgivable.
If you overstate your revenue or understate your debt, and a lender finds out, then watch out.
“You will have wasted your time and tarnished your business with that lender for prospective future needs. It's not worth it," Tirey says. “Our general advice to customers is to fill out your application with the same information on your tax returns and business licenses. Remember, this is a legal document you are signing."
4. Find the right lender.
“Financing sources have different targeted markets," Vrancik says.
“Banks tend to lend to established businesses with assets; investors tend to invest in scalable businesses in certain industries. Some are not so obvious," she continues. “They may not lend to certain types of businesses, or they may have high exposure in certain industries or they may favor certain locales."
If you don't have a go-to lender already, Vrancik recommends searching around, before applying at the place that seems to be the least complicated, such as your bank.
But where to look? You may want to ask for ideas from business owners in your industry who you don't directly compete with. If you're part of a business forum or the chamber of commerce, you have a lot of contacts who may have some lenders they'll want to recommend. Going to a trade industry show any time soon? Ask around for some referrals of a lender in your industry.
5. Make it obvious that the lender will get their money back.
That's all any lender wants, really—to be paid back what they gave you, plus whatever interest you've agreed upon. That's lending 101. But does your application make it clear that you know that?
“When you are applying for business loans the bankers are always evaluating your ability to pay the loan back," says Jerry Ross, president and CEO of the <a href="http://www.nationalec.org/" rel="nofollow">National Entrepreneur Center, an Orlando-based nonprofit that offers free business coaching and low-cost business seminars.
“Banks are not in the risk business, so they are judging you on the 5 Cs of credit: character, capacity, capital, collateral and the loan conditions," Ross says.
Your application needs the supporting materials to make all of this clear to a lender, Ross says. To make it obvious you're a good steward of your money, you may want to attach letters of reference and complete business records to your application, he says.
Sure, you can probably get some quick infusion of cash without doing a lot of this. But if you want to borrow money with low interest rates and terms that don't keep you awake at night, take your time to find the right business loan.
Your business loan, after all, should solve problems—not make new ones.
Read more articles on loans.
Photo: Getty Images
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.
