A lot of entrepreneurs have tried—and failed—to get a business loan.
But a business credit expert has seen a spike in small business loans since the TARP bank bailouts. So who are the lucky entrepreneurs securing business loans? Tom Kish, author of Shortcut to Money, says that you can increase your chances of success if you avoid these four mistakes.
Get a Business Loan by Avoiding These Four Mistakes
Kish says that TARP required banks to extend loans to small businesses, but the banks are still wary when lending money. Avoid these mistakes that send the wrong message!
Mistake #1: Applying for one big loan instead of multiple smaller loans.
Let’s say you need to get a business loan for $100,000, but your business is relatively new. You have no business credit score and your assets are scarce. Do you think a bank is going to lend you $100,000?
But if you apply for five or six smaller loans, you might have more success, says Kish.
Instead of applying for a $100,000 loan, start with a $10,000 loan—or even a $5,000 loan. The first loan will probably be the hardest to secure, but once your business proves its ability to repay the loan, you will find it much easier to get a business loan, and another, and another. Soon, you will have that $100,000.
Mistake #2: Applying as a sole proprietor
A lot of people walk into a bank to get a business loan, but unbeknownst to them, they won’t even qualify because their business is not registered properly. If you are a sole proprietor, you will not quality for a business loan, even if you have a Fictitious Business Name or “DBA.” Your business must be registered as an S-Corp, C-Corp, or LLC.
Kish says that banks will laugh at a person who applies for a business loan as a sole proprietor. But if you walk into a bank representing an LLC or Corporation, the banker will practically shine your shoes.
In fact, business loans don’t even exist for sole proprietors. Instead, people who have not registered their businesses properly must apply for personal loans. They can then use the loan for business needs, but this causes other problems, as you are about to read.
Mistake #3: Failing to separate yourself from your business.
A lot of banks require an owner or principal to have a great personal credit score before extending a line of credit. This might be a little confusing, so let me back up a bit to explain.
The loan itself will be in the business’s name, and it will not be reported to the entrepreneur’s personal credit score. However, to secure the loan, the entrepreneur’s personal credit score will be checked.
So if you were once a sole proprietor who used personal credit to pay for business needs, you might be in trouble. Debt caused by your business increased your overall debt, which might have degraded your personal credit score.
Imagine, for instance, that you use a personal credit score to buy a computer, a laptop, a printer, the peripherals, and software for your home-based business network. The grand total is somewhere near $8,000. The limit on the credit card is $15,000.
Your personal credit score is based, in large part, on something called a “utilization rate.” A utilization rate is the amount of debt you have expressed as a percentage of your limit. If you have an $8,000 balance on a credit card with a $15,000 limit, your utilization rate is 53 percent. Unfortunately, your credit score suffers if your utilization rate exceeds 30 percent.
By buying a computer network using your personal credit card, your personal credit score just dropped. This means that when you finally do register your business correctly and apply for that business loan, your personal credit score might get in your way.
This is a problem for a lot of entrepreneurs. Fortunately, you can take a few small steps to build your credit score in preparation for a business loan.
Mistake #4: Applying at the wrong bank
If you have few assets and a limited history, your best bet is to find a bank that offers unsecured lines of credit based on stated income applications. These loans do not require collateral, tax returns, or a business plan.
Start looking for these banks online. Then call the loan departments. If your business has few assets and a limited history, you will not qualify for a secured loan. Don’t even bother applying for these—it will only lead to frustration. You will be much more likely to get a business loan if you do your research and apply at the appropriate banks.
Philip Tirone is the author of 7 Steps to a 720 Credit Score and the creator of the Credit and Debt Summit, where registrants can learn new strategies for reaching their financial goals, like how to get a business loan. To learn more about this strategy, and others, read the transcripts from Tom Kish’s webinar by registering for the Credit and Debt Summit.