worried man considering business loans

6 Mistakes to Avoid When Applying for Business Loans

Your business is in need of cash—perhaps because it is doing so well that you need to add a physical location, integrate new employees, add new equipment or purchase extra inventory. Fortunately, business loans are available to help your company achieve its goals and continue to thrive.

However, lenders are careful to give business loans only to companies that inspire confidence in their ability to repay. Several mistakes during the loan application process can eat away at that confidence. These missteps can ultimately cause lenders to reduce the sum, increase the interest, or deny the loan altogether. Because you need cash, here are a few mistakes you must avoid.

Applying for the Wrong Type of Business Loan

A loan is an expensive commitment. Therefore, it is incredibly important that you make the most optimal commitment for you and your company.

Before you apply for business loans, conduct extensive research to fully understand the terms of the loan you are considering. For example, you should look into the qualifications for the loan. Inquire about the likely interest rate you will receive and the time frame for acquiring the loan. Also, understand what the loan can be used for and more.

If you lack experience in pursuing financing, you might want to seek counsel from a professional at your local Small Business Development Center. Alternatively, develop a relationship with a lender in your area.

Dissembling with Financial Information

Your lender is as interested in your repaying the loan as you are. They rely on the financial information you provide about yourself and your business to determine how much debt your organization can take on.

If you lie about your finances in any way, such as by over-representing or obfuscating your financial situation, you could put yourself at risk of committing fraud. In addition to costing you egregious fines, this could put you in jail. It is much smarter and safer to tell the truth to your lender. This is always the case, even if it means that you could be denied for the loan you want.

Applying for Loans During a Financial Emergency

The absolute worst time to apply for a business loan is when your organization is on the brink of financial collapse. The more desperate you are for funding, the more difficult loans will be to secure. Instead, you should be carefully tracking the financial health of your organization. Apply for loans well before your business starts to falter.

Even better advice is to apply for loans only when business is booming. These are the times when you are likely to acquire excellent amounts and terms to keep growth high.

Failing to Make a Plan for the Business Loan

You should never apply for a loan without knowing exactly what you are going to do with that extra cash. Most lenders require you to have a plan for the loan before they will even consider releasing money to you. Moreover, if you use the loan for anything other than its stated purpose, you can get in legal trouble.

However, if you do manage to get a business loan without committing to a course of action, you should still know exactly how you will spend the money. This will ensure that you are only applying for loans when you have a meaningful purpose for the money. When you know beforehand how you will use the loan, you are likely to see a positive return on that investment.

Misunderstanding the Loan Terms

Every loan has terms. Even the loan you receive from your father-in-law is likely to come with demands and provisions. It is imperative that you read the fine print associated with your loan before you accept and receive the loan amount. You might also spend time talking to your lender about the terms to ensure that both you and your lender have reasonable expectations. Failing to respect the terms of a loan could have any of dozens of negative ramifications. Basically, the more you know about your loan, the better.


Assuming the Loan Will Solve All Problems

It takes money to make money, but that does not mean that a business loan will always solve your business problems. A loan is a useful tool for helping you capitalize on a business opportunity. But it is only useful if you receive a higher return than your investment. Throwing money at a problem that will not pay you back will only cost your business. Before you apply for a loan, you might consider if there are other, non-financial actions you can take to rectify your issue.


You should try to do everything in your power to avoid major financial mistakes, especially financial mistakes associated with business loans. By taking the time to research your loan options, lenders, terms and more, you can make better financial decisions for you and your growing company.