Whether you're applying for a business loan or a personal loan, there are common mistakes that can hinder the process. Below are 10 of the most common mistakes made when applying for a loan.
- Not knowing your credit rating. Before you apply for a loan, you need to know where you stand. Get copies of your credit scores from the three major credit bureaus so you will know if you're likely to get the loan approved.
- Not reading the terms carefully before signing. In your haste to get a loan, you may commit the common mistake of jumping the gun and signing without reading the details and terms of the loan. Not only should you take the time to read everything very carefully, but you should also ask questions about anything you do not fully understand.
- Not locking in a rate. Interest rates change. If you think you've found a good rate, lock it in before it goes up. Too often, people make the mistake of getting greedy and waiting for interest rates to drop farther.
- Not explaining what the loan is for. When applying for a business loan, you need to indicate how the money will be used. Lenders want to see that you know exactly what your needs are and how this loan will meet those needs.
- Making major changes. Just as you do not want to open and close various credit cards before applying for a personal loan, you do not want to make significant personnel or other changes to your ongoing business structure before applying for a business loan. Lenders want to be able to see stability in how you do business and with whom.
- Applying only to the most convenient lender. Although there are various lenders available, many people still head to their local bank first without shopping around. Credit unions and other sources are worth investigating. For example, if you are a small business owner, you should consider what the Small Business Administration can do through one of their loan programs.
- Not having your finances up-to-date. Whether you are seeking a personal or business loan, you shouldn't apply without having the proper financial documentation. This is an area where many people put the cart before the horse, and try to get a loan without making sure their financials are up-to-date.
- Failing to have some equity in the project. Not unlike a down payment when buying a home, having some equity in a business project significantly enhances your chances of securing a business loan. If you're not invested in the project, or in the business itself, the lender will be less enthusiastic about taking on such a risk.
- Having no collateral. You need to provide some collateral, should there be a default in payment.
- Not having a business plan. If you're starting a business, you need to demonstrate how the business will operate and make money. A business plan is essential for a lender to see your goals and specifically, how you intend to reach them. You must include all applicable supporting data, including financials.
For more information, check out AllBusiness.com's Business Loans Center.