There are millions of small businesses in the United States—around 32.5 million in fact. Yet, the startling truth is that, while millions exist, 20% of small businesses end up shutting their doors for good within the first year. More close within the first five years of business, with 80% of them claiming that cash flow issues were the main cause. Obviously, you don’t want the same outcome for your business, which is why you are seeking small business funding. Having some working capital will help you avoid the struggles of other businesses and even help you scale. But before you start applying for business loans, be sure to know the common mistakes that could negatively impact your eligibility.

Top 7 Mistakes to Avoid When Seeking Small Business Funding

Here are seven common pitfalls that small business owners run into when seeking funding:

1. Overlooking Your Credit Score

Your credit score is a reflection of your creditworthiness and financial responsibility. As such, it plays a pivotal role in the loan approval process. Also, your credit score will actively determine what kind of loan you can receive.

Here is the typical credit score requirement for the most common small business funding options:

• Term Loan: 600-700 or higher. Banks usually want at least 680-700. Some lenders—mainly online or alternative lenders—will accept credit scores as low as 550.
• Microloan: Scores vary widely but most will accept credit scores as low as 600.
• Business Line of Credit: 600-700.
• Business Credit Card: A score of 680 or higher for most credit cards.
• Merchant Cash Advance: A score within the fair to good range, typically 600 or above.

If your credit is not within this range, it is time to consider taking proactive steps to increase the score. While basics like reducing debt and paying bills on time are fundamental, consider diving deeper into credit score improvement. One strategy is to diversify your credit mix by responsibly managing various types of credit, such as credit cards, loans, and lines of credit. Maintaining a low credit utilization ratio (the amount of credit used compared to your total available credit) can also boost your credit score.

A higher credit score not only increases your chances of loan approval but also opens doors to loans with more favorable terms, including lower interest rates. It’s wise to check your credit score in advance, understand where it stands, and actively work on improving it before applying for a loan.

2. Not Having a Clear Plan

When you are applying for a small business loan, it is not merely enough to want the loan. You need to show the lenders that you have a clear plan for not only expanding your business but for using the loan they provide. In other words, you need to draft up a well thought out and detailed business plan that explains precisely how the loan will positively impact your business.

You will need to show the lenders a breakdown of how the capital will be invested. To help with this, consider outlining specific projects, initiatives, or areas of your business that will receive funding. For example, if you’re seeking a loan to expand your product line, explain the new product development process, the anticipated production costs, expected market demand, and the potential revenue this expansion will generate.

Furthermore, demonstrate a clear understanding of the expected return on investment (ROI). Lenders are interested in knowing when and how you plan to repay the loan, ideally through the increased revenue generated by the funded activities. The ability to articulate a detailed plan with a strong ROI strategy can significantly enhance your loan application’s credibility.

3. Not Researching Your Funding Options

There is more than one way to receive funding for your small business. You can receive a term loan, a merchant cash advance, a business line of credit, a business credit card, invoice factoring and many other options. Each of these loan types have their own merits and drawbacks. Understanding which ones ask for collateral, the credit score needed for eligibility, and how these loans can be applied to your business will be helpful in your search.

Furthermore, you should consider interest rates and other fees associated with each loan. You may find that that term loan provides you with more financial stability than a merchant cash advance or vice versa.

4. Applying for Multiple Loans Concurrently

It’s natural for business owners to explore multiple financing options, especially when facing a shortage of working capital. However, applying for multiple loans simultaneously can have adverse effects on your creditworthiness.

Lenders and credit bureaus view multiple loan applications within a short timeframe as a sign of financial distress or instability. Since many lenders will do a hard pull on your credit, multiple applications can negatively impact your credit score and reduce your chances of loan approval. Instead, take a strategic approach by carefully evaluating your financing needs and selecting the most suitable lending option from the beginning.

If that option falls through, you can then move onto the next candidate.

5. Not Keeping Your Financial Statements Organized

When applying for a small business loan, you will need to furnish your application with several financial documents. To the lender, having these documents enhances your financial transparency. Typically, you will need to provide at least two years of financial history. This can be through tax returns, bank statements, or other documents.

In addition to the mandatory two-year financial history, consider preparing financial projections that showcase how the loan will contribute to future growth. These projections can demonstrate your vision for the business and how the loan will play a pivotal role in achieving those goals.

Furthermore, be aware of specific lender requirements regarding financial statements. Some lenders may request audited or reviewed financial statements, which involve a higher level of scrutiny and assurance. Being prepared for these additional requests can expedite the application process and enhance your credibility in the eyes of lenders.

6. Not Choosing The Right Lender

Selecting a loan is a lot like choosing a business partner. You want to make sure you are choosing the candidate who is going to support your business the best. In other words, you need to look at what they bring to the table and compare them to the other strong candidates.

There are many kinds of loans out there. Similarly, there are many lenders. You have banks, credit unions, online lenders, government-backed institutions, and alternative options, like crowdfunding, to consider. Each kind of lender has their own pros and cons. For example, if you go with a bank, you know the institution will be ethical and transparent. The bank will provide you with a fair loan and a decent interest rate.

An online lender may be more flexible with their criteria for your application, but they may also have higher interest rates and shorter repayment terms than a bank.

You should also look at ratings for each of the lending institutions, as well as testimonials from their previous customers. If the vast majority of customers are satisfied and no issues have been raised, then you can trust that the lender is not a scam.

7. Applying for Financing Too Soon

Yes, you can make the mistake of applying too early. Many lenders will want to see that your business has been open and operating for several months. Depending on the size and type of loan, you may need more than two years of business history. This can be understandably devastating for a new business that is seeking capital. However, there are options, including SBA startup loans (microloans) and grants.

Here is a business loan tip: If you need a larger loan, don’t worry. Take some time building up a reputation and a better credit history by repaying a smaller loan. Once the two years is up and you have your documents handy, you can then apply for a more robust small business loan.

Looking For a Small Business Loan?

Now that you have seen common business funding mistakes and learning a couple small business loan tips, you can move ahead confidently with your loan application. Remember to cultivate a healthy credit score, develop a compelling business plan, and conduct plenty of research on your loan options. When the time comes, choose a lender who is flexible and reputable, like New Bridge Merchant Capital. We have plenty of options for small businesses, including term loans and merchant cash advances. Give us a call at 844-228-0593 today to learn more about your options. We’re committed to helping your business thrive.