Three Common Mistakes Borrowers Make – and How Lenders Can Help

We all know the old saying “an ounce of prevention is worth a pound of cure”. When it comes to borrowers looking for a business loan, that’s especially true. Borrowers, especially those who’ve never applied for a business loan, are prone to making mistakes. These errors can cause them to be denied, of course – but it’s often worse for them if they are issued a loan in spite of their oversights. Here are five common mistakes borrowers make – and how lenders can help those borrowers avoid unpleasant conversations down the road.

Mistake #1: A Poor Business Plan

A business plan should be more than just a great idea and an outline of how to make it into a reality. In order to make sure the borrower isn’t going to get in over his or her head, that plan must include a detailed projection of the borrower’s cash flow. This will help ensure that the borrower doesn’t borrow too much – possibly resulting in payments that they can’t afford – or too little, which might require them to incur more debt.

Mistake #2: Being Vague about Needs

Borrowing money just to have it on hand is a recipe for disaster. The borrower should have a thorough understanding of where that money is going. Are there assets and equipment that need to be purchased? Are there services related to the business that need to be paid for? Borrowers who take out business loans without first having a plan for allocating those funds may find themselves in trouble.

Mistake #3: Not Understanding The Repayment Terms

Borrowers who fail to completely understand the terms of repayment are obviously setting themselves up for problems. Lenders should do their best to make sure that the borrower thoroughly reviews the terms and conditions; lenders should be mindful of borrowers who go through the documents quickly, with few or no questions asked. It never hurts to gently push back and encourage the borrower to take the time and ask questions before signing.