4 Mistakes to Avoid When Applying for a Bank Loan

 

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BY Catherine Clifford|May 18, 2012|

 

As part of National Small Business Week, Cleveland, Ohio-based KeyBank and Los Angeles-based Open Bank will each receive a 2012 7(a) Lender of the Year Award by the Small Business Administration on Monday in Washington. (The SBA's flagship lending program is known as 7(a).)

KeyBank is being honored as the large bank that supported the most jobs with its SBA lending, making the most loans and loaning the most dollars to underserved markets and utilizing the most SBA programs. Meanwhile, Open Bank is receiving the accolade as the small bank that approved the most loans and dollars. It also was recognized for approving the second highest number of loans to underserved markets.

Of course, getting a loan from a bank is no cakewalk these days, particularly for small businesses. So, we asked those banks, which make it their business to lend to small business, how entrepreneurs can increase their chances of securing loan dollars.

Here, they share the top four mistakes business owners make when applying for a loan -- and how to avoid them.

Mistake #1: Underestimating the value of personal credit.

Bankers look at your personal credit history (credit cards, mortgage payments and personal bills) to get a sense of your track record with financial responsibilities, says Michael Toth, Senior Vice President of Business Banking at KeyBank. “If a business owner hasn’t shown the diligence in managing their personal credit, there is potentially a stronger likelihood that they will take the same approach to their business credit,” he says.

Mistake #2: Applying for the wrong type of loan.

One of the most notable pitfalls Toth sees is small business owners using credit intended for a short period of time for a long-term purchase, or vice versa. “They will use the wrong type of credit product for the wrong type of purpose,” says Toth. For example, if you buy a piece of machinery with a loan that was intended to fill a short-term need like employee payroll, then you risk being saddled with a loan that you can’t get out from under.

Mistake #3: Expecting a loan without collateral or a plan to pay it back.

 A banker won’t approve a loan that he doesn’t think has a chance of getting paid back. So be sure to detail in your business plan how you are going to make the revenue to pay the loan back or any collateral you have to back it up. Also, be sure to explain why the loan is critical for your business. “Make sure there is a solid business plan as to what they are planning to do with their business and how the financing will support the mission for the company,” says Toth.

Mistake #4: Waiting too long to approach a banker.

Small business banking is about relationships. Toth says there's a much better chance bankers will lend you money when you need it, if they already know who you are and what your business is. Not only will you develop that face-to-face relationship, but you will also have the opportunity go get your business financials organized and in shape with a banker’s eye in mind.