7 Common SBA Loan Mistakes and How to Avoid Them

If you’re starting a small business, there’s a good chance that you’ll be looking into an SBA loan.

Banks usually issue SBA loans to small businesses to help deal with everything from startup costs to expansions. They’re partially guaranteed by the Small Business Administration, which gave out nearly $800 billion to small businesses in 2020.

Although the loans themselves are flexible, and there are many different types of loans, you can apply for, getting one isn’t necessarily a cakewalk. In this post, we’re going to tell you about the most common SBA loan mistakes and how to avoid them.

Finding the right SBA loan for your needs requires knowing what will hinder your progress. Keep reading, and you’ll know what to do and what not to do.

1. Not Having a Plan

Anyone lending your business a substantial amount of money will want to know why you’re asking for the money and what you’ll do with it. As a borrower, you have to be able to explain, in minute detail, how the funds are going to impact your business moving forward.

If you go into a meeting unable to explain anything beyond your current working capital, you’ve already failed. At the end of the day, the lender wants to know that the money will put your business in a position to thrive so that you can pay the loan back with interest.

When starting out, an SBA loan provider will want to see a detailed business plan. A business plan outlines every aspect of a startup. Lenders need to see this to understand how thought out, and viable your business is, not to mention what the money will be used for.

2. Waiting Until You’re Financially Vulnerable

Waiting until you’re desperate for money is never the right time to apply for an SBA loan. Not only are most lenders going to show concern about the financial state that your business is in, but you’ll be more inclined to take a less-than-ideal loan.

The best way to avoid this is to stay on top of your financial projections so you know well in advance if there’ll be a need for outside funding in the future. When you fill out an SBA loan application, the lender will want to see things like tax returns, income statements, YTD balance sheets, and a list of debts.

There’s not much that you’re going to be able to hide. Go into the process as organized and aware of your business’s financial condition as possible.

3. Asking for Too Much (or Too Little)

Many inexperienced and misguided business owners will either ask for too much or too little from an SBA loan. The benefits of SBA loans are endless, so long as you do the calculations to figure out exactly how much money you need.

If you ask for too much, you may be denied on the basis that you won’t be able to pay it back with interest. If you ask for too little, you may be granted the loan, but it may not have the impact on your business that you’re projecting.

With a thorough business plan and a cash flow analysis, you should be able to figure out what you need. Don’t borrow unnecessarily and make sure that you’re getting enough to do what you need to do.

4. Not Knowing Your Business Credit Score

Loan terms and conditions are always heavily dependent on your credit score, whether they’re personal loans or SBA loans. If you are completely unaware of where your business credit stands, you’re going to be in the dark about what types of loans you’ll be able to secure.

Various things impact a business credit score, from payment history and credit utilization to company size and industry risk. Your personal credit score will come into play as well. Every lender is going to check both before qualifying you for an SBA loan.

By monitoring your credit, you can get a better sense of what the terms of a business loan might look like. You may decide to take your time to better your credit before applying to secure better terms for your SBA loan.

5. Failing to Read the Fine Print

While we’re on loan terms and conditions, it’s essential to read the fine print when getting a loan. You never know what could be hidden in there, whether it’s massive pre-payment fees masked by low-interest rates or prepayment penalties for trying to pay the loan off early.

Having a good lawyer to help you work through the fine print is never a bad idea. The last thing you want is to have difficulties paying your loan back because of something that was hidden in plain sight.

6. Changing Your Business

How stable a business is over a sustained period of time contributes to its viability as a borrower. If you’re planning on making sweeping changes to how your company operates, or if you’re making changes to your business plan, do it after you’ve secured your SBA loan.

In a way, this goes back to planning. Do everything you can to show your lender that you have stable leadership and a clear vision for the future of your business. Firing or hiring people, changing structure, taking on new expenses – all of these things show a degree of uncertainty that will make a lender wary.

7. Choosing the Wrong Lender

You should never go into the process with only one SBA lender in mind. Compare the terms and conditions of multiple loans and figure out which one is going to help your business reach the next stage of its growth.

It’s all about securing the best rates and terms. If you’re not looking at every option, you’ll never successfully do that. One of the ways to get the best loan for your needs is to contact us at USA Funding.

Our group of qualified accountants will examine your profile and work with you to ensure that your loan gets approved. We’ll work to secure you terms and conditions that will help your business succeed, not hinder its progress.

Don’t Make These SBA Loan Mistakes

Now that you know what the most common SBA loan mistakes are, you can take the right steps to avoid them. Knowing the right way to approach the SBA loan process is the first step toward a brighter future for your small business.

To get approved for an SBA loan with the perfect terms and conditions, connect with one of our loan specialists today.