3 Business Loan Application Mistakes and How to Avoid Them

Access to affordable capital is essential to running a small business. Still, the process of applying for a business loan can be daunting — and approval isn’t a sure thing, even if you have good credentials.

According to the Federal Reserve’s 2021 Small Business Credit Survey, 12% of businesses that needed financing but chose not to apply did so because they believed they would be turned down.

With loan approval rates slowly climbing at the beginning of 2022, however, business owners have an opportunity to refine the application process and improve their chances of getting approved for the funds they need.

Here are three common mistakes to avoid when applying for capital for your small business.

1. Choosing the wrong small-business lender

Before starting the application process, one of the first mistakes you can make is choosing the wrong lender.

It’s important to ensure that a business owner is looking in the right place, says Tony Giuliano, vice president of credit policy and underwriting at Accion Opportunity Fund, a nonprofit community development financial institution based in California.

Going online and doing a quick search may not be the best way to find a small-business lender. “In some of those cases, you could find someone who’s charging exorbitant fees or you could just be a number, and if your credit score isn’t good enough, just get rejected without much help or assistance,” he says.

Giuliano recommends performing thorough research to understand the lending market, as well as your business’s current situation. He says using several resources — such as experts from your local community development financial institution or the Small Business Borrowers' Bill of Rights — can help you better understand the different products and programs and, hopefully, provide you with more available options.

2. Rushing the paperwork

A business loan application involves a variety of personal and business documentation, but the specific information you’ll need to provide can vary widely from lender to lender.

“Perhaps the biggest mistake that business owners can avoid is submitting incorrect or stale items to the lender,” said David Tuyo in an email. Tuyo, the CEO of University Credit Union, which serves employees, students and alumni of several universities throughout California, added, “Borrowers need to ensure that everything they submit as part of the application process is entirely accurate and timely.”

And with the adoption of automated underwriting, it’s even more critical that you read and answer all application questions carefully. If you’re applying online and the lender is using automated technology, says Giuliano, and you input the wrong information — or don’t answer the question as intended — it could result in an automatic rejection.

Being organized is essential when navigating different lender requirements and handling multiple loan applications. Therefore, you should have all of your documentation and financial information in one place, orderly and readily available, says Elizabeth Magennis, president of ConnectOne Bank, a regional bank with locations in New York and New Jersey.

Magennis recommends using basic financial software, such as QuickBooks, to simplify organizing and quickly pull your financial numbers.

3. Going through the process alone

Whether you’re trying to get a business loan for the first time or you’ve been through the application process before, it can be overwhelming to manage all of the moving parts, especially while continuing to run your small business.

“I think a lot of the time, business owners may not have the right advisory team to help them get organized and guide them through the financing process,” Magennis says. “Across the board, I’ve seen business owners go back and forth with their lender trying to get the right documentation, when they should be reaching out to their accountant, attorney or local Small Business Development Center for assistance,” she says.

Financial professionals, SBDCs or other local business organizations can help you prepare your business finances, work with you to address questions or problems during the underwriting process, and hopefully, improve your chances of loan approval.