Applying for small business loans can be tricky. You want to make sure that you’re applying for a loan that works best for you and your company. Too often, businesses will apply for a loan they don’t qualify for or that doesn’t benefit their business needs. Below are the top 5 mistakes you should avoid when applying for a loan. 

1. Not knowing your credit score

Your credit score greatly impacts your ability to get small business loans. It’s not just your business’s credit that’s being looked at, but your personal credit as well. Tools like Experian help you see your personal credit and what’s impacting it, while companies like Dun and Bradstreet help you keep tabs on your business credit. When looking into lenders for small business loans, check both credit scores to see if they meet the requirements. If they don’t, hold off on applying and address the factors hurting your scores. When your scores improve, start applying for a loan.

 2. Not having a business plan

Having a business plan is essential to running a business, but it also can affect your chances of getting a small business loan. Lenders take business plans into consideration when trying to determine creditworthiness. Although not all lenders require a plan when you apply for a loan, they like to know one exists because it shows them your business’s goals and how you plan to reach them. A business plan also shows how well you know your industry in order to succeed in it. If you need help building your business plan, check out LivePlan. Make sure you have your plan ready before you apply for a loan.

3. Not applying for a loan that works for you

Knowing the different requirements of small business loans keeps you from applying for a loan you might be unqualified for or finding the lowest rate. Don’t apply to the most convenient lender. Figure out what you need the cash for, and if you’re better off with a traditional loan or a line of credit. Remember to read the terms and conditions before you sign a loan, and always ask questions. It’s better to be safe than sorry!

4. Not knowing where your revenue currently stands

If you’re looking for a small business loan but aren’t keeping track of your revenue, you could be setting yourself up for disaster. Your revenue gives you an idea of how much cash you need and how much you can pay back. It also helps you avoid consolidating your debt and sinking your business. Applying for a loan is no simple task. Really think about where your business stands now and where it will stand in the future.

5. Not understanding the difference between a secured loan and an unsecured loan

Credit plays a large part in determining if your small business loan will be secured or unsecured. Credit scores are much stricter for unsecured loans, as they put banks at a higher risk. Should you default, lenders could sue, but usually they will charge a higher rate. A secured loan is less risky for the bank, but a lot riskier for you. The bank can seize your property and assets to pay off any debt you’ve defaulted on. Remember these risks when applying for loan. If there’s a chance you could only receive a secured loan as well as default on it, hold off on applying for a loan.

Make sure you’re staying ahead of the game when applying for a small business loan by avoiding these five common mistakes. Remember, you can always seek help or ask for advice before you apply for a loan. When you go to apply, be sure to have all of your ducks in a row so you can go in confidently and effectively to receive the right funding to help your business succeed and grow to its fullest potential!

About the Author

Constantina Kokenes is a Content Specialist at Kabbage, a small business loans provider. She holds a Master’s degree from Northwestern University, where she learned how to create content that could best be organically shared. When not in the marketing world, Constantina enjoys strategy games and singing along to the Law & Order: SVU theme song.