Securing funding can be complicated. It starts with the application process, where questions around your personal credit repayment history may be asked, particularly if you mix your personal and business finances.
When it comes to something as multifaceted and complex as obtaining business funding, there are numerous issues that may prevent you from applying and getting approved for a business loan.
Here are five pitfalls that small businesses should avoid in order to successfully secure that loan:
- Making the minimum required payments
- Missing scheduled payments
- Being complacent about your borrowing limits
- Mixing personal spend and credit activities with your business
- Using business credit to pay down personal debt, or vice versa
It may be tempting to pay only the minimum payment on your credit card every month, which is either a fixed amount or small percentage of your balance. This is true for both personal and business cards, particularly if your finances aren’t completely separate.
Paying only the minimum sum not only racks up ridiculous amounts of interest — which can skyrocket into double-digit rates — it also hurts your credit score. By not paying the full sum, your balance only reduces by a small amount, meaning that you are using more of your credit limit, which will cause your credit score to suffer and hurt your chances of applying for a loan for your business.
Furthermore, you will constantly have to deal with outstanding debt management, and might even get you into the bad habit of avoiding a healthy repayment schedule.
In a typical month, you might be handling dozens of payments at once with different due dates.
However, all it takes is one missed payment to severely damage your credit score. Unless you’ve completely separated your business and personal finances, lenders may check your personal credit before making the decision to issue a business loan. If you miss a payment, you will also likely have to foot a late payment fee, which can be up to $40, and you might even see your interest rates spike because of the slip-up.
Therefore, having a good credit score is essential for any small business owner looking for funding. The later you pay, the lower your credit score, and the lower your chances of obtaining a loan.
A quick and easy way to ensure that you do not make this mistake? Set yourself up on autopay, or use monthly calendar reminders for when your payments are due.
Another trap that businesses tend to fall for is being satisfied with their current borrowing limits. As long as you have a spotless history of repaying on time, many lenders will be glad to increase your borrowing limit.
A higher borrowing limit is advantageous for small businesses in two ways: first, by being allowed to borrow more, your current credit usage is a smaller percentage of allowable credit, which some credit agencies use in their calculations. Second, it gives you an extra borrowing opportunity that you can tap if and when you need it.
Remember that borrowing potential is not the same as being indebted — in fact, if your opportunity to borrow is higher relative to the amount of debt owed, you actually appear more bankable, which increases credit scores.
Mixing your personal and business finances does not just look unprofessional or give you a massive headache every time you file your taxes. It can also severely affect your credit score, and thus your chances of securing funding for your business, as personal and business credit scores mutually influence one another.
For example, you might be thinking of taking out personal credit cards and loans for your business. However, if you run into financial trouble or are unable to repay on time, your credit will dip.
This can result in a domino effect, damaging everything from personal insurance rates to your business’ ability to get more funding in the future.
This is related to the previous point, but it bears repeating. You might think that it is easier to pay for your personal expenses — or even another debt — using business credit, or perhaps the other way around.
However, this not only makes monthly accounting that much more difficult, it also puts your account at risk of being closed. This is because card issuers often make you agree to use your business card only for business expenses, and any expenditure that seems out of the ordinary is a red flag.
Furthermore, it can hurt both your personal and business credit score. If you put personal expenses on your business credit, and you cannot pay off the balance, your personal credit score is likely to suffer. This is inevitably bad news for any small business owner who is applying for a loan.
The five points above are some factors that lenders do not tell you about when assessing how suitable your business is for a loan. From ensuring that your company has sufficient credit to maintaining your collateral and cash flow, applying for a loan is no easy task, much less getting approved for one.
Keep in mind that you can always get a fast, free, and transparent credit score from Tillful. That will highlight a lot of issues that your business credit profile might have, allowing you to make sure you’re putting your best foot forward when applying for a loan.
Hopefully, with the above tips in mind, you can successfully obtain funding for your business.
