Business Loans: Avoid These 4 Mistakes

If you own a business or plan to open a new business, there is high probability that you thought of taking a loan to expand or start it. We have the four most common mistakes that people make and whole bunch of guidelines and resources to help you get this right.

The information provided here is for general information only and should not be used as legal advice.

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4 Mistakes That People Make When They Apply For A Business Loan

  1. Do you have a business plan? Without a business plan, any business idea is likely to fail. The first and most important step is to make a business plan and visit your banker as soon as possible.
  2. What type of loan will you take? You don't want to ask for a short-term loan to buy an expensive machinery which you need a long time to pay off. You need to consult your lender in order to find the best solution for your needs.
  3. Choose your lender wisely. Don't think that the first offer you get will be the best one. Different banks and credit unions might have good options for your business. Check if there are specialized financial institutions or specialized loans suited for you.
  4. Not thinking about lending capacity. If deposits to your bank account are low or if you do not have any collateral it is not easy to get a loan solely on a good idea. You should have a financial plan within your business plan and also think about different legal needs regarding lending capacity.

20 Largest Commercial Banks In The United States

Rank Bank Name Bank Location Assets (Mil $)
1 Navy Federal Credit Union Vienna, VA 9,179
2 State Employees Credit Union Raleigh, NC 3,838
3 Penfed Alexandria, VA 2,365
4 BECU Tukwila, WA 1,864
5 Schoolsfirst Federal Credit Union Santa Ana, CA 1,503
6 First Technology Federal Credit Union Mountain View, CA 1,212
7 The Golden 1 Credit Union Sacramento, CA 1,197
8 Alliant Credit Union Chicago, IL 1,064
9 America First Credit Union Riverdale, UT 1,011
10 Security Service Federal Credit Union San Antonio, TX 949
11 Suncoast Credit Union Tampa, FL 918
12 Randolph-Brooks Federal Credit Union Live Oak, TX 899
13 Star One Credit Union Sunnyvale, CA 879
14 DCU Marlborough, MA 861
15 San Diego County Credit Union San Diego, CA 842
16 Federal Credit Union Bethpage, NY 839
17 America Credit Union West Jordan, UT 778
18 Credit Union Jacksonville, FL 770
19 Alaska USA Federal Credit Union Anchorage, AK 745
20 American Airlines Federal Credit Union Fort Worth, TX 695

20 Largest Commercial Banks In The United States

Rank Bank Name Bank Location Assets (Mil $)
1 JPMorgan Chase Bank Columbus, OH 2,198,296
2 Bank Of America Charlotte, NC 1,765,242
3 Wells Fargo Bank Sioux Falls, SD 1,716,532
4 Citibank Sioux Falls, SD 1,406,778
5 U S Bank Cincinnati, OH 452,256
6 Bank Of NY Mellon New York, NY 297,107
7 T D Bank Wilmington, DE 294,830
8 Capital One Mc Lean, VA 289,878
9 State Street B&TC Boston, MA 247,203
10 Branch BKG&TC Winston-Salem, NC 215,012
11 Suntrust Bank Atlanta, GA 199,970
12 HSBC Bank USA Tysons, VA 179,972
13 Goldman Sachs Bank USA New York, NY 171,731
14 Ally Bank Sandy, UT 143,049
15 Fifth Third Bank Cincinnati, OH 139,445
16 Morgan Stanley Bank Salt Lake City, UT 136,730
17 Keybank Cleveland, OH 135,188
18 Northern Tc Chicago, IL 129,223
19 Chase Bank USA Wilmington, DE 129,012
20 Citizens Bank Providence, RI 122,429

What About Hidden Costs And Fees?

Dealing with difficult financial decisions when you are developing a new business or expanding existing one can be overwhelming for a person. Since financial institutions try to make their profits higher, they are constantly finding ways to attach hidden costs and fees that can overburden a developing business. There are numerous fees and costs associated with loans. Some of them are loan insurance, redemption fees if you want to pay back the loan earlier, added interest to the annual percentage rate etc. All of them can have strong legal and financial ramifications if they are not examined and addressed in a well-written loan application. To have a successful business means to cover all bases and to fully understand what you got yourself into.

Total Nonperforming Loans For Commercial Banks In The United States

Year Amount (Mil $)
2007 62,588
2008 147,455
2009 306,027
2010 347,397
2011 291,849
2012 267,533
2013 213,203
2014 162,630
2015 130,154
2016 123,125
2017 105,668

How Do You Know That You Can Trust Your Lender?

Choosing a lender can sometimes be a hard and complicated choice. Usually, small business owners choose a location which is near their primary place of business and they disregard other important information. But what can you do fast? The first thing you should look at is the speed that decisions are made. If you have a request for a large loan and the bank has to check with the home office it means they have the low lending authority and maybe even capacity. Also, check if they are making Small Business Administration (SBA) backed loans. Special products and services that lenders offer are most likely a sign of high development and security. The more the merrier. It is also good to know what kind of added services do you get if you open an account. Do they make a services package or do they sell everything separately like the online banking system, accounts, credit and debit cards?

Share Of Non-performing Loans Held By Banks In The United States From 2007 To 2017

Year Total Share
2007 1.01 %
2008 2.21 %
2009 4.70 %
2010 5.30 %
2011 4.50 %
2012 3.95 %
2013 3.04 %
2014 2.21 %
2015 1.67 %
2016 1.47 %
2017 1.22 %

Interview With A Loan Officer

“Most people don’t plan to fail, they fail to plan.” The fact still remains, if you go unprepared to a loan interview, the request will be denied or the lender can ask for additional measures to secure their loan. But if you follow our guide and avoid mistakes, there is a good chance that you will successfully test your business idea. Have your documents with you, memorize all the important facts, dress nicely and put a nice smile on your face, because the future is here.

In Depth

The light bulb is on. You got the best business idea in the whole world and you have a nice picture of yourself sitting in the office on the top floor of your brand new building. But you lack money to start or expand your existing business, so you have to take a loan. It can be a very tricky process, especially if you you've never done it before. These are the 4 most common mistakes that can stop you from getting in that corner office that you desire.

Mistake #1: You don't have a business plan. When applying for a loan, the first thing that the loan officer will ask if you have a business plan. Its goal is to show when and how the loan will be paid off. And to add, it also has to be good, not just written. Take for example a brilliant idea of Sergey Brin, a Google co-founder. He thought that people could order a pizza with a fax machine, which no one had at that point. There is also the case of famous Rupert Murdoch who bought MySpace in 2005 for $580 million. He sold it 6 years later for $35 million and he tweeted, "we screwed up in every way possible".

Business owners have been known to abuse businesses that they own, for their personal gain. We aren't lawyers, and this isn't legal advice, but if you plan to have a nice Hawaii vacation with the loan you take for your business, you may be in trouble because it can be considered a tax fraud. Mr. Carlo J. Marinello was using money from business accounts to pay personal expenses and even mortgage. He was sentenced to 36 months in prison and ordered to pay $351,763 in unpaid taxes. To avoid these scenarios read our full guide on how to avoid 4 major mistakes when getting a business loan. You can find it right on this web page. Get started now beneath this video.

He was sentenced to 36 months in prison and ordered to pay $351,763 in unpaid taxes.

Writing a business plan can prove to be a difficult task especially for the beginners in business. And it is also important to test your business idea. In 1979, IBM gave advice to future owners of Xerox that "The potential world market for copy machines is 5,000 at most". Today it's worth over $42 billion. It seems that the market is worth a bit more than 5,000 copy machines. If the task of making a business plan is too demanding, you can always hire a professional help.

Mistake #2: What type of loan will you take? It is possible that you are romanticizing too much about your new career that you forgot that there are different types of loans and that their prices vary. Oh, and yes. You have a price tag on each loan, which is called interest. You already know this, but keep it always in your mind. Remember Hawaii vacation?

If the goal is to buy new equipment, we don't mean brand new Bentley for night parties, but specific tools for your business, you should consider specialized loans. These loans are in fact cheaper because they have a lower risk associated with them, and the purchased equipment can be used as a collateral. The strangest case of a collateral for a loan comes from Spanish Bank called Bankia. They offered Cristiano Ronaldo, one of the best players in history, as a collateral for a loan to European Central Bank. Fortunately, the loan was returned and Cristiano didn't have to leave his soccer club.

If the goal is to buy new equipment, we don't mean brand new Bentley for night parties, but specific tools for your business, you should consider specialized loans.

Mistake #3: Choose your lender wisely. Every business has a bank account. It is only natural to talk to the banker you have built a relationship with. Your bank is the first one in line to give you the loan, but it is important to explore different possibilities. Sometimes, really bad things might happen. Mr. John H.'s checks were processed out of order on purpose, to charge non-sufficient funds fee. There was also a strange case where California-based First Mortgage Corp made a good loan look bad. The idea was to cheat on investors so that they could buy off those mortgages and resell them afterward.

If you don't want to end up like Mr. John H or investors in First Mortgage Corp, be sure to check out our full guide on how to avoid 4 mistakes when taking a business loan. Scroll below this video to read it.

If you are running a small business, The U.S. Small Business Administration has three loan programs that can help you get the funding by guaranteeing up to 75 or even 85% of the total loan issued by lenders.

If you are running a small business, The U.S. Small Business Administration has three loan programs that can help you get the funding by guaranteeing up to 75 or even 85% of the total loan issued by lenders.

Mistake #4: Not thinking about lending capacity. It is great to have an original idea and a good business plan, but are you able to convince the lender that you have a financial capacity to ask for a loan? You might think that Ronaldo's situation was odd, but convincing a bank officer reached a whole new level in Nigeria. A woman wanted to pledge a Holy Spirit as collateral. She claimed that "He does not lie, and He does not fail." At first, she was rejected, until she came back with the wife of the bank's chairman of the board and so the officers were convinced.

That was one way to get a loan. The other one is to read our full guide on how to avoid 4 mistakes when taking a business loan, right below this video.

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