Mistakes To Avoid When Applying For Working Capital Loans
Working capital loans are often the key to getting your business through an expensive growth phase without depleting your reserves or disrupting the flow of business in your existing accounts and income streams. That makes understanding how to land one essential for any small business owner who has enough success to consider a sizable expansion, no matter what industry you operate in. The best choice of loan product and the best way to land it can differ a little according to the loan type, but there are a few mistakes that can hurt your chances across the board, and it’s important to know how to sidestep them.
The first mistake lenders see is a lack of a clear business plan. Often, companies know to submit information on their financial health and credit, including their income statements and a rundown of their business structure. Those same companies frequently make the mistake of leaving out realistic projections that help demonstrate why the injection of capital into the business is a good risk. While a business plan that demonstrates you can pay back the loan under any circumstances is a solid winner, most companies that need a working capital loan don’t have that kind of cash flow. Instead, the bank assesses the realistic chances of your operation succeeding in a way that makes repaying the loan easy for you, especially if you already have outstanding debt from asset purchases or credit lines.
Another unforced error many companies make is failing to understand the choices open to you. Many businesses that do not qualify for unsecured debt in the form of medium to long-term loans have other assets that can be leveraged to gain funding, from outstanding invoices and purchase orders to inventory on hand, merchant accounts for credit processing, and even the equity in buildings or equipment. Leveraging these assets can provide the extra security lenders need in order to grant the loan. This means the right loan product can actually make or break your application.
Last but definitely not least is the mistake of overlooking your company’s credit score. It’s easy to miss out on the score being lower than you expect because the exact methods of influencing business credit scores are less predictable than they are for consumer credit, and not every vendor and service provider who extends you credit reports on your payment progress. Looking into your score, doing work to reduce overhead debt, and correcting any outstanding balances before you apply for a working capital loan is essential to making sure your application is as attractive as possible.