June 14, 2023 By Kristin Woodward

Seeking outside funding for your small business may be stressful. From determining how much and what type of funding to making sure you’re getting an affordable loan, there’s a lot to consider. Learn some common mistakes small business owners often make when applying for an SBA loan so you may increase the chances that your loan application process will be as smooth and streamlined as possible.

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1. Lack of preparation

Ensuring you have all the pertinent business documents in order and available is the first step to applying for an SBA loan. No matter what type of loan you’re seeking, each lender likely has slightly different document requirements. So investigate what is needed and ensure you have up-to-date paperwork ready to go before starting the loan process.

Required documents will likely include:

  • Business tax returns
  • Income statements (year-to-date)
  • Balance sheets (year-to-date)
  • Schedule of liabilities (list of all business debt)
  • Personal tax returns
  • Personal financial statement

Working closely with a financial professional, like your bookkeeper or accountant, to help set up systems and processes to keep you organized from the day you open your doors, is one way to enable you to easily access these important documents when applying for a loan or anytime you need them.

2. Not asking for enough money or asking for too much

Before you start investigating funding for your small business, you need to do the math. Know exactly how much you need to borrow to meet short and long-term goals. The goal is to cover your needs but not over-borrow to ensure you can afford your loan and aren’t paying additional interest for money you don’t necessarily need.

Two documents to help you determine this are your business plan and cash flow analysis.

3. Lack of a business plan

A business plan is a formal statement of goals, reasons they are attainable, and strategies for reaching them. Often, a business plan is required when applying for a small business loan. (Note: SmartBiz® does not require customers to submit a business plan when seeking an SBA loan.) To learn more about this critical document, read: How to start a business plan.

Many, though not all, lenders will ask to see your business plan when you seek funding. Your business plan may be the single most straightforward way to show lenders how their money could result in profits with which you can repay them.

This notion is especially true if you’re starting a business instead of funding an already successful operation. Plus, once you’ve applied for a loan and received it, you may generate enough business finances to repay your debts.

4. Not checking eligibility requirements

Each type of loan offered by the SBA comes with its own unique set of eligibility requirements. These criteria may range from the nature and size of the business to the intended use of the loan funds and even the specific industry the company operates in.

It's crucial to understand that the SBA has set these guidelines to ensure that its resources are allocated to businesses most likely to benefit and grow from their assistance. Therefore, it’s essential for business owners to thoroughly check and ensure that they meet all the eligibility requirements for the specific SBA loan they are interested in before starting the application process. Neglecting to do so could waste valuable time and resources and even lead to immediate disqualification from the loan program. Hence, understanding the eligibility requirements of your preferred SBA loan is generally a fundamental step in the loan application process.

5. Insufficient cash flow

A cash flow analysis is a financial document that lists the cash funds that move in and out of a company’s accounts. The basic formula is simple: cash in minus cash out. Find out what this equation reveals about your small business by visiting SmartBiz University®, where we’ve covered all the key steps to analyzing cash flow.

Specifically, the document demonstrates how well a business can balance revenue and expenses. You’ll typically find this analysis in conjunction with the balance sheet and income statement.

6. Not knowing your personal credit score

Your personal credit score is a number that evaluates your creditworthiness based on your credit history. Once you accept your first job or apply for a credit card, a personal credit profile is started with the three credit reporting agencies – Equifax®, Experian®, and TransUnion®. Eventually, this report becomes an indicator of your ability to pay back a debt. Credit scores range from 300 to 850. Typically, the higher the score, the more financially trustworthy a person is considered to be. Even when borrowing for your business, lenders consider your personal credit score.

7. Not knowing your business credit score

Lenders will also consider your business’s track record with credit. There are a few different business credit scores that may come into play:

  • Lenders use FICO® LiquidCredit® Small Business Scoring Service℠ (SBSS) to determine the likelihood of on-time payments. The FICO SBSS score is based on personal and business credit history, along with other financial information. The SBA uses this score to pre-screen applications for commercial loans under $350,000. Scores range from 0 to 300; the minimum score to pass the SBA’s pre-qualification is currently 140.
  • Suppliers and vendors use Dun and Bradstreet PAYDEX® Score to determine what terms to extend on trade credit (e.g., net-30, net-60, etc.). Scores range from 1 to 100, with higher scores indicating better payment performance.
  • Lenders use the Intelliscore Plus℠ from Experian to determine the likelihood of delinquency over the next 12 months. Again, scores range from 1 to 100.

It’s worth noting that each scoring agency may compile different information on the same business. Thus, it may be that all three of your business credit reports and scores are different.

Note that you can pre-qualify for an SBA 7(a) loan offered through a bank in the SmartBiz network without impacting your credit score. SmartBiz reviews a soft pull of your credit report to determine if your business is pre-qualified. This does not impact your credit score.* Learn more here: Soft vs. Hard Credit Pulls.

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8. Not counting all costs

The interest rate for a small business loan isn’t the only number you need to pay attention to. When you apply for an SBA loan, you’re also responsible for a number of other costs. While these vary from lender to lender, banks in the SmartBiz network typically charge a one-time application fee of no more than $3,000. 

Additionally, the SBA charges a guarantee fee, which helps the issuer pay for administrative costs and other expenses and also reduces the risk and potential for loss in the event of default. You’ll probably be responsible for a guarantee fee when you receive an SBA loan. 

Bank closing costs typically add additional cost and include standard bank fees, though additional third-party report charges may also apply. Be sure you understand all the fees and costs involved that will ultimately impact your final loan numbers.

9. Not reading the fine print

Some financial institutions might advertise enticing initial loan offers that mask unfavorable terms. Low introductory interest rates, for example, may hide excessive prepayment fees that make it tougher to close out your loan early. Always read the fine print of any small business loans you consider to ensure that the loan flexibly meets your needs.

10. Not securing a good interest rate

When weighing fixed versus variable rate loans, you’ll often read that variable loans prove more affordable in the long term. This notion is generally true, but if you do need an unchanging rate, you should consider locking it in sooner rather than later. That’s because, more often than not, interest rates will go up before they go down. Don’t be left shaking your head in regret – secure that low interest rate now, and it may last your entire loan term.

11. Changing how your business operates

Business stability is generally a conduit to more accessible financing. That means hiring and firing people is often best saved after obtaining funding. The same is typically true for shifts in your business structure – not waiting until later is a common mistake when seeking an SBA loan. The small businesses in the best shape for SBA loans often retain their structure until they receive their money.

12. Not shopping around

Comparing loans may feel exhausting, and business loan applications are often tedious. As such, it’s understandable to want to go with the first lender you find, but doing so is typically ill-advised. In fact, not looking at other options is among the most common mistakes when seeking SBA loans. Lenders other than your sole choice may have more favorable rates and terms – and you simply can’t know without looking.

13. Lacking collateral

Small business owners take significant risks on loans, and so too do lenders. After all, there’s no guarantee that borrowers will repay their loans. That’s why SBA loan applications often require you to put up collateral that the lender can seize if you default on payment. Lacking resources to put up as collateral thus puts you in a poor position from which to seek loans. 

Collateral for an SBA loan can take several forms. Real estate, equipment, and machinery, inventory, even personal assets are examples of collateral that businesses might use for an SBA loan. The specific type required may depend on the size and nature of the loan, as well as the specific requirements of the lender. 

Remember, each lender may have different requirements for what can be used as collateral, and the SBA also has guidelines. If you need help determining what you are able to use as collateral, speaking with a financial advisor or your lender is generally a good idea.

14. Inflating debt without increasing income

The more small business debt you’ve taken on, the harder it is to get approved for an SBA loan. That changes if your income rises in tandem. You may signify this relationship with the debt-to-equity ratio or debt-to-income ratio. The first time you borrow from a particular lender, they may seek a debt-to-income ratio of at most 1.35. So when you take on debt, be sure it will increase your income, too, so you may increase your chances of obtaining business financing.

15. Going it alone without expert assistance

There’s a reason small business success is typically correlated with hiring employees: Rare is the business venture that’s better without other people. The same is generally true of applying for loans. In fact, many individuals or organizations specialize in working with entrepreneurs looking to grow their small businesses. These entities’ expertise may make applying for SBA loans that much easier – and successful funding more likely.

16. Rushing Through the Process

It is essential to understand that the SBA loan application process is complex and requires careful attention to detail and preparation. Gathering the necessary financial documents, creating a detailed business plan, ensuring creditworthiness, and possibly providing collateral are all important steps in the process. Attempting to rush through the application may lead to errors or missed details, resulting in a declined application.

Furthermore, a rushed business plan or inaccurate financial statements could decrease the probability of loan approval. Therefore, you should give yourself ample time for each stage of the application. Take the time to review each document thoroughly, prepare properly, and consult with financial advisors or professionals who may be able to assist you in navigating the complexities of obtaining an SBA loan. Don't forget, a well-prepared loan application is more likely to be approved.

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