If you run a business or are looking to start one, chances are you will need a loan at some point. This is an important financial decision, so do some prior planning and try to avoid these common mistakes.

1. Not applying for the right kind of loan

One of the biggest mistakes you can make when applying for a small business loan is simply applying for the wrong kind of loan. Be sure to explore all the options available to you. Will you qualify for an SBA loan? Will a line of credit help you smooth over the rough spots in your cash flow? Do you need a loan specifically designed for equipment purchases? Your business banker can be a great source of information about which type of loan will have the greatest impact on your success.1

2. Not being honest when seeking your loan

Make sure you're being completely honest with your potential lender about your intentions for the money. Don't over-represent your ability to make use of the money and to pay it back while honoring its terms.

"Any financial information regarding your business should be clear and tangible," says Marco Carbajo at The Balance Small Business.2 "Many small business owners end up cooking figures in order to please the bank, forgetting that a bank can still verify the information on your application. This leads to loan denials if the verification process shows different figures from what you submitted."

You should be honest with yourself as well, because otherwise you may find that you're in over your head. Don’t overstate your future income or understate your future expenses.

3. Waiting to apply for a loan until you're in an emergency

One of the most common mistakes small business owners make is waiting until they desperately need money to apply for a loan. Unfortunately, this is when it becomes harder to secure. If you apply when the cash is flowing you’ll be more likely to get approved, and you can make timely payments without jeopardizing the health of your business. If times do get tougher, the money from the loan will be there to help out.

4. Not having a real plan for the money you're borrowing

For starters, not having a plan may hinder your ability to get the loan you're seeking, since lenders will ask you for a concrete plan to use the money and how you’ll be able to pay it back. In addition, having a good grasp on how you will use it can prevent you from using it in less meaningful ways, or even in ways that can do more harm than good.

5. Not having a clear understanding of the terms

Another way to do damage to your business is to take out a loan without understanding its terms. If you miss information in the fine print, you may come to find that you're not getting quite the deal you were expecting. Ask questions if anything is unclear, and make sure you are 100 percent confident in what you are signing. Don’t be afraid to ask your banker for clarification.

6. Using the money for something that doesn't lead to increased revenue

Make sure you use the money from your loan to help your business in ways that lead to increased revenue. Otherwise, you risk running out of money. You may think it's a good idea to use the loan to cover things like payroll or your personal salary, but as the National Federation of Independent Businesses notes, this is a bad idea.

The NFIB shares this wisdom from GreenPal CEO Bryan Clayton, who calls using a loan for these things a Band-Aid:3

"Clayton recommended small business owners make sure the funds will be used to fuel growth, not just maintain current operations. 'Ask yourself, "Why?" five times when you’re considering taking on debt to run your business,' he says. '[If it won’t] fuel growth [and it’s just] to keep the lights on, that’s never a good idea.'"

7. Assuming that money is the answer to everything

Finally, simply make sure that a loan really is the answer to the problem you're trying to solve. Money can obviously help you fix a lot of issues and help you maintain success, but issues like poor customer experience or personnel problems aren't going to go away because you take out a loan.

Nevada State Bank offers a wide variety of business financing options, and will work to help you structure financing to fit your company’s needs. Read about available offerings here.

 

1. Nevada State Bank offers a number of different types of small business financing, including Small Business Administration financing, business lines of credit, term loans, equipment leasing, factoring/business credit solutions, and agricultural financing.

2. https://www.thebalancesmb.com/small-business-loan-application-mistakes-to-avoid-4147452

3. http://www.nfib.com/content/resources/alabama/5-biggest-small-business-loan-mistakes-74972/

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of Zions Bancorporation, N.A. Member FDIC