7 Commercial Loan Application Mistakes to Avoid

Your commercial loan application will need to be meticulously prepared in order to secure the highest financing at the lowest interest rate to save you money. Applying for a commercial loan to expand your business is very different from applying for a mortgage or auto loan, but many business owners make mistakes of treating the applications the same way. Here are a few common mistakes to avoid on your commercial loan application in order to ensure your financial success:

Mistake #1. Not having a business plan. 

Your business plan needs to be present before opening your doors. A good business plan includes details for your product, infrastructure, marketing and competitive advantage. Above all the plan should convey the market research showing you have a good chance of success. When you are applying for funding, your business plan needs to show accurate figures for the amounts you need and how you will generate revenue to pay these loans off in a specified time frame.

Mistake #2. Not designating the funds toward a specific project. 

Part of your business plan needs to highlight where the new commercial loan will be used. You cannot simply ask for a boost of $30,000 to help pay employee salaries for a quarter. Good reasons to seek a commercial loan include buying equipment, purchasing another business, buying land or developing a new product.

Mistake #3. Not providing sufficient documentation of need.

Once you state how the funds will be allocated, provide documents to substantiate your request. If you state you need $5,000 for a new truck, provide a document showing the exact truck you intend on purchasing and the quote you received for $5,000. This is particularly important if you are purchasing real estate or land to cultivate or mine. You need to show the investment has proven ability to generate profits for your business through assay reports or real estate assessments.

Mistake #4. Not offering equity or collateral.

Securing a commercial loan without collateral will drive up your interest rates. Most business loans will determine a loan to value ratio using the business itself as collateral. If this is a new business, you may have to use your personal assets such as an automobile or a home.

Mistake #5. Making changes to your business immediately before seeking a loan.

Making significant changes to your business ownership, structure or team of employees can alter the effectiveness of your original business plan. Your lender is evaluating how well that business plan worked for you in order to determine whether to provide you more funds to expand on it. Firing a senior official may lead the lender to question whether or not your business will continue on its success.

Mistake #6. Not shopping around.

Accepting the first quote you get is convenient but not effective. You should consider many options including banks, venture capital and online lenders before choosing the loan that is right for you. Give yourself options so you have the power to walk away from a negotiation if a lender is not giving you the terms you desire.

Mistake #7. Opting for an adjustable rate. 

When you are starting out an adjustable rate may be attractive because it offers low initial monthly payments. Think long term. Choose a fixed rate that will save your business money over time.