When you want to grow or stabilize your business, securing a business loan is one of the most important steps for success. However, many small companies in Canada make loan application mistakes because the process can be daunting.
After all, many traditional lenders and banks can make it challenging to qualify. They have lengthy application periods and decision-making processes that can leave even the most patient entrepreneurs a little frustrated.
To limit back-and-forth, today’s blog features Bizfund’s business loan application tips. These should help you avoid common mistakes. So, stick around if you want to learn more about application errors you don’t want to make and how to prevent them. We also discuss how to prepare a strong application and provide a foolproof checklist.
These Are the 7 Common Mistakes to Avoid
If you want to save valuable time, reduce stress, and improve your chances of a loan approval, you’ll find the information below interesting. We’ve rounded up the top 7 mistakes businesses make when applying for a loan.
But that’s not all. We’ve also given some expert advice on how to avoid them:
- Poorly Managing Credit
We truly hate being the bearer of bad news if you didn’t want to hear it, but an evaluation of your credit score is often part of the underwriting process. In most cases, a lender will need to check your business credit score and, for entrepreneurs, your personal credit score.
With this in mind, one of the biggest mistakes you can make is mismanaging your credit score. It can severely impact your chances of a successful loan application. Additionally, although unfortunate, you can’t rely solely on cash flow to compensate for poor credit.
How to Avoid This Mistake
To avoid the common mistake of mismanaging your credit, build your credit over time. You can do this by repaying debts such as business lines of credit, credit cards, and loans. You also need to ensure you repay on time. Even a single missed payment can reflect poorly on your credit profile.
In addition, you also need to make sure you aren’t taking on more debt than you can afford, as lenders will check your debt-to-income ratio when evaluating your credit profile. If you have too many debts, you’ll not have many applications approved.
- Misunderstanding Loan Language and Terms
If you own your own business, you’re likely familiar with business terminology, but you may not know much about loan language or terms.
Often, a mistake many companies make is applying for a loan, assuming they understand unfamiliar terms. Unfortunately, this can cost your business dearly in terms of APR versus APY, interest rates, amortization schedules, and various fees.
How to Avoid This Mistake
The best way to avoid misunderstandings of terms or loan language is to ask for help. You can find good quality sources online that can teach you about loan terminology, or you could speak with the lender. They can explain what everything means in relation to your loan. If you have a question, be sure to ask, as you don’t want a simple misunderstanding to cause issues.
- Possessing Limited Documentation
When applying for a loan, many businesses fail to provide enough documentation. Typically, lenders require legal identification and at least three years of financial records. If you cannot provide this documentation and submit incomplete or inaccurate applications, it can jeopardize your loan approval. For instance, if your reported finances don’t entirely match what you reported for your taxes. It’s a big no-no all around.
How to Avoid This Mistake
The easiest way to avoid missing required documentation is to check which documents are needed before you apply. If you review the documentation required by the bank or lender, you can ensure you have everything on hand when you apply in person or online. Just make sure to double-check that your documents are accurate and current to avoid discrepancies and delays.
- Overborrowing Or Taking On More Debt Than Necessary
It can be tempting to borrow more than you need, but this is one of the biggest mistakes businesses make. Although debt financing is a valuable tool, it still means you’ll commit to fixed payments. This can put pressure on your business cash flow.
In addition, when you apply for more funding than needed, you risk straining your cash flow when revenue fluctuates, which is often the case for certain industries. Not to mention, higher loan balances mean you’ll have to pay higher installments for longer periods of time, which can severely affect your company’s flexibility in the marketplace.
How to Avoid This Mistake
The best way to avoid taking on more financing than you need is to base your loan amount on realistic cash flow projections. You shouldn’t be basing your funding on best-case growth assumptions, so try to avoid doing this.
Our advice is to map out exactly how you want to use the funds, the essentials you need to fund, and how the repayments will fit into your monthly operations. This should help you determine how much you should and shouldn’t borrow when applying for a Canadian business loan. If you borrow only what you need, it will support your short-term needs while helping you preserve cash flow and reduce financial risk.
- Not Shopping Around
When you’re looking for financing, it can seem like the easiest way to access more working capital is to pursue a traditional bank loan. This isn’t always the case. If you consider only traditional financing, you risk accepting terms and conditions that may not be favorable to your business over the long term. Not to mention, choosing a needlessly expensive traditional loan can damage your cash flow and potentially your credit profile in the future.
How to Avoid This Mistake
If you want to avoid settling for an unfavorable traditional loan, you should shop around with non-traditional lenders like Bizfund. Many lenders offer merchant cash advances and short-term loans, each with its own benefits depending on your needs. So shop around and research requirements, fees, and costs, along with lender reputation and credibility, to put your business in the best position possible.
- Applying For The Wrong Type Of Loan
Among the many application errors one can make, applying for the wrong loan type is one of the worst. Many businesses in Canada make this mistake. They apply for funds, and the amount or type of loan product doesn’t align with their business needs.
For instance, applying for short-term financing for a long-term investment. Or applying for working capital when the need is actually equipment financing. Unfortunately, mismatches like these can create unnecessary pressure. This pressure can come from repayment schedules, limited use of funds, and higher costs, which you want to avoid.
How to Avoid This Mistake
The best way to avoid selecting the wrong loan product is to clearly define what the loan is intended to support. Once you know what you need the funds for, you can begin evaluating loan products. These must align with your needs, timeline, structure, and repayment goals. Doing this will help ensure the loan product you select supports your business growth.
- Failing to Develop a Solid Business Plan
A business plan is an essential guide for a company. It’s also an invaluable tool when applying for a small business loan in Canada. In fact, many eligibility requirements call for a business plan, but unfortunately, many businesses don’t have one to show lenders. Without a business plan, there is no ‘dashboard’ so to speak, meaning there is no proof to a lender that you have the know-how and skills to operate a profitable business.
How to Avoid This Mistake
If you don’t already have a business plan or yours is rudimentary at best, it’s time to create one or spend some time revising and improving the current plan. When you create or revise a business plan, focus on what lenders are looking for.
Usually, you should include your business description, executive summary, and your outline of industry and competition. It’s also a good idea to include prior experience that demonstrates your ability to operate successfully.
Business Loan Application Tips: Preparing a Strong Application
Before you get ahead of yourself and apply for a loan, it’s a good idea to step back and think about approval strategies and what lenders will evaluate as a whole.
In addition to avoiding mistakes, you need to consider how you position your business and choose the right timing. You also need to make sure you target the right lender.
So with this in mind, here are a few business loan application tips to help you focus on preparation strategies that strengthen your application before it reaches an underwriter’s desk:
- Before a lender raises questions, explain any gaps or anomalies. If your financials show recent debt, seasonal dips, irregular revenue, or a short operating history, it’s best to be upfront about them. Usually, a brief, clear explanation of why there were irregularities can help your application be approved and avoid lenders assuming the worst.
- Don’t solely focus on choosing the right loan, but also the right timing: It can raise red flags if you’re applying for a loan during a cash crunch or after you miss repayments. Whenever possible, apply when your business’s revenue is stable and your accounts are in good standing.
- Match the type of lender you choose to your business stage: The lender you choose should align with where your business is now. This means you need to focus on lenders whose criteria align with your company’s industry, size, and operating history, as these factors can significantly affect approval.
Final Checklist
Before you move forward with your application, you might want to take one more quick look at the checklist below. If you have a look, you can improve your chances of approval:
- Make sure all business financial statements are complete, current, and consistent with your tax filings.
- Review your personal and business credit profiles and credit reports to identify any errors or unresolved issues that could affect your application.
- Double-check that the loan amount reflects what you need, not what you would like.
- Carefully review the business loan terms to ensure you clearly understand the defined fees, rates, and repayment timelines.
- Make sure your business plan explains your business’s market, operations, and management experience.
- Confirm your company has a realistic repayment strategy that isn’t based on best-case projections but instead on existing cash flow.
Key Takeaways
Now that you know more about the common business loan application mistakes and how to avoid them, you’ll be on a better footing to secure a loan. We also hope the business loan application tips we shared alongside the checklist help you prepare better.
However, if you don’t want to go the traditional loan route, you can access alternative financing options through Bizfund. At Bizfund, we offer merchant cash advances to small Canadian businesses. Application is easy, and we don’t rely solely on credit profiles.
We also provide cash quickly with faster approvals, and you could qualify for between $10,000 and $300,000. Speak with us here to see how we can help your business grow.
