Loan application myths – believing them will set you back from vital cash

by • December 28, 2019 • SME LoanComments (0)377

Don’t fall victim to loan application myths

At some point in their life, most small businesses will go to a bank or other lending institution with what they believe to be good business loan proposals to borrow money for expansion of their operation. Many small business owners, however, initially fall victim to several of the common and potentially destructive loan application myths that concern applying for loans. You should always do your own research.

By: Phoenix Lee/

Loan Application Myths

For example, first-time borrowers commonly believe the following loan application myths:

  • Lenders are lined up and eager to provide money to small businesses.
  • Banks are willing sources of financing for start-up businesses.
  • Loans are obtained by talking the lender out of funds.
  • When it comes to seeking money, the company speaks for itself.
  • A bank, is a bank, is a bank, and all banks are cold, impersonal institutions.
  • Banks, especially large ones, do not need and really do not want the business of a small firm.

Research shows that 67 per cent of all small businesses that borrow money get that money from commercial banks. This places banks among the largest sources of credit; and makes them one of the most vital components to small business survival. Understanding what your bank wants and how to properly approach them with good business loan proposals can mean the difference between getting your money for expansion and having to scrape through finding cash from other sources.

The name for people who simply walk into a bank and ask for money is “Bank Robbers”. To present yourself as a trustworthy businessperson, dependable enough to repay borrowed money, you need to first understand the basic principles of banking.

loan application myths

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Your chances for receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate their position. Banks have a responsibility to government regulators, depositors, and the community in which they are in. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors money safe, the banking regulators happy, and the economic health of the community growing.

Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans. Selection of a bank is essentially limited to these choices. Furthermore, a bank will typically not make business loans to any size business unless a current account or money market account is maintained.

Ultimately, your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.

5 steps to applying for a business loan

A good loan specialist will be able to assist you in deciding which bank will best suit your needs and prepare good business loan proposals.

As such, you should devote time and effort to building a background of information and goodwill with the bank you choose, and get to know the loan officer you will be dealing with early on. You should also build a favourable climate for a loan request long before the funds are actually needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. That is like walking into a funeral parlor carrying a body.

Remember that bankers are essentially conservative lenders with an overriding concern for minimising risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust, and to those who make good business loan proposals.

Experienced bankers know that every firm encounters occasional difficulties; a banker you have taken the time and effort to build a rapport with will have faith that you can handle these difficulties. A responsible reputation for debt repayment may also be established with your bank by taking small loans, repaying them on schedule, and meeting all facets of the agreement in both letter and spirit.

By doing so, you gain the bankers trust and loyalty. He or she will consider your business a valued customer, favor it with privileges, and make it easier for you to obtain future financing.

Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks, and providing the evidence required to ease normal banking concerns, is the most effective approach to getting what is needed.

good business loan proposals should contain information that expands on the following points:

  • What is the specific purpose of the loan?
  • Exactly how much money is required?
  • What is the exact source of repayment for the loan?
  • What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
  • What alternative source of repayment is available if management’s plans fail?
  • What business or personal assets, or both, are available to collateralise the loan?
  •  What evidence is available to substantiate the competence and ability of the management team?

Good loans – how do lenders determine who they can give money to?

Even a brief examination of these points suggests the need for you to do your homework before making a loan request. It is a virtual certainty that an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions, or to provide unacceptable answers, is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.

Don’t believe in business loan application myths. It is your integrity and business experience that the lender really is relying upon when you are trying for business financing with unsecured debts.

When trying for business financing with debt with lenders, remember that your presentation and loan application must emphasize your character and credit-worthiness and business experience.

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