Ever wondered why some businesses consistently secure commercial loans with ease, while others struggle to do so? Some might attribute this to luck, but it’s not just a matter of chance.
Applying for a commercial loan is a significant undertaking for any U.S.-based business owner, and even minor mistakes can be costly.
Over the years, I’ve seen business owners make the same mistakes repeatedly—and I’m here to spill the tea so you don’t have to learn from your mistakes!
A Good rule for business is to learn from others’ mistakes. Here are seven pitfalls to avoid and tips to keep your application on track.
Mistake 1: Lack of a Solid Business Plan
Lenders don’t want to mess around when you’re applying for a commercial loan. They want to see that you’ve got your act together.
A solid business plan is your golden ticket to proving your business isn’t a pipe dream.
I once knew a guy named Mike, a real go-getter with a brilliant idea for a farm-to-table app. He had a passion for days, but when he went to the bank, they shut him down faster than you can say “funding.”
Why? No business plan. Nada. No financial projections or market analysis, just a deal. The lender couldn’t see how he’d make money, so they passed.
How to Avoid It: Build a killer business plan. Include an executive summary, company description, market analysis, management structure, product details, marketing strategy, funding request, and financial projections.
It’s your roadmap to success, make it as clear and detailed as it can get!
Mistake 2: Poor Credit Management
Your credit score, both business and personal, can make or break your commercial loan application.
A small business owner I met at a networking event applied for a loan to expand her bakery.
She had decent revenue, but her credit was a mess from some old student loans she’d ignored.
The bank didn’t care about her cupcakes. All they saw were red flags, and they said no.
Lenders review your information to assess whether you’re a risk worth taking. So, if you ignore it, you’ll reduce your chances of getting approved for a commercial loan.
How to Avoid It: Stay on top of your credit game. Check your reports regularly. Pay your bills on time. You should keep your credit utilization low.
For small businesses, personal credit often matters too, so don’t sleep on it!
Mistake 3: Not Comparing Loan Options
Jumping on the first loan offer is like buying the first car you see without test-driving others. You might miss out on a better, sweeter deal!
My friend needed cash for his retail store. He took the first commercial loan offer that came his way.
Obviously, it came with a decent rate and quick approval. But, a month later, he found out about another lender who offered lower interest and better terms.
My friend found himself banging his head for not shopping around.
How to Avoid It: Do your homework. Compare rates, terms, and fees from multiple lenders—banks, credit unions, online options, you name it.
It’s your money. Make sure you’re getting the best option against it!
Mistake 4: Ignoring Loan Terms and Conditions
Those tiny words in the loan agreement are not for decoration. Take your sweet time reading it. Skipping the fine print can hit you with nasty surprises later.
Take my friend Tom, who applied for a commercial loan for his gym. He was doing fine until he got slapped with a huge prepayment penalty, which he didn’t see coming.
Turns out, he hadn’t read the terms closely. Had he done that, the chances of him getting caught up in such a mess would have reduced manifold.
How to Avoid It: Read every line like it’s a treasure map. Look out for interest rates, repayment schedules, fees, and penalties.
If you are unable to understand something, ask the lender to break it down for you in simpler words. Knowledge is power! Read, so you know what you are getting yourself into.
Mistake 5: Choosing the Wrong Loan Type
Not all commercial loans are the same or have similar terms. Picking the wrong one is like wearing flip-flops to a snowstorm. You’ll find yourself totally out of place.
I once chatted with a startup founder who applied for a short-term loan to buy equipment.
The problem was, he needed long-term financing to spread out the costs. The high monthly payments nearly sank his business before it even took off.
How to Avoid It: Match the loan to your needs. Short-term loans work for quick cash; long-term ones suit big investments.
Research options like term loans, SBA loans, or lines of credit, and pick what fits your goals.
Mistake 6: Inadequate Financial Documentation
Messy books are a lender’s nightmare. When applying for a commercial loan, they want clean, clear financials to trust you with their money.
I saw this firsthand with a local café owner. She had a solid business, but her financial records were in chaos. Missing receipts, sloppy statements, etc.
The lender couldn’t make heads or tails of it and denied her application.
How to Avoid It: Get your ducks in a row. Prepare balance sheets and income statements. Also collect he documents of tax returns, and prepare cash flow projections.
Keep everything up-to-date and organized. If you don’t want to be doing that yourself, a good accountant can be your best friend here!
Mistake 7: Overlooking Lender Relationships
A strong bond with your lender can work in your favor. Ignore it, and you’re just another application in the pile.
Build a relationship with the manager that will pay off, and you might end up getting faster approval and a better rate than you expected.
How to Avoid It: Don’t ghost your lender. Build rapport over time. Stop by, ask questions, and keep them in the loop about your business.
It’s a lot about trust. Your lender will be looking to be able to trust you to pay back the loan on time.
Wrapping It Up
While applying for a commercial loan, avoid these seven slip-ups to improve your chances of getting approved!
If one lender says no, don’t worry too much about it. There are plenty of options out there.
Take a deep breath, polish your application, and you’ll get that funding approved from one of the lenders!