An SBA line of credit is sure to give growth potential to any small business. It holds the perk of flexibility and relatively low rates compared to loans. On the contrary, it is not as simple as filling out a form and immediately waiting for approval. Small business owners unknowingly commit mistakes that may act as roadblocks or even hinder the funding altogether. 

To maximize your chances of approvals and circumvent interjections, here are some of the considerations that go into avoiding the typical mistakes in application for an SBA line of credit.

1. Incomplete or Incorrect Documentation

The application procedure calls for a lot of documentation, including tax returns, financial statements, and business licenses. Incomplete or incorrect documents may lead to delays or outright rejection. 

Ensure you carefully examine the requirements of an SBA line of credit before applying for one. Have all of the required documentation prepared, including personal and business tax returns for the past few years, profit and loss statements, and a thorough balance sheet. Be prepared to clearly explain cash flow within your business and cash flow projections for future periods.

2. Bad Credit History

Bad credit history, whether personal or business, can seriously keep you from qualifying for an SBA line of credit. While the SBA does not lay down strict credit score requirements for 7(a) loans, lenders usually do consider your credit history in the loan application. A low credit score or a history of missed payments can be a red flag for lenders, even if your company is otherwise solid.

Also, if your business carries its own credit score, work on the creditworthiness of the firm too. Lenders will look at both your personal and business credit.

3. Applying for the Wrong SBA Program

The SBA has various loan programs, each with its own terms and conditions. Some small business owners apply for the wrong program while they do not understand that technically any of the SBA loans might better suit their needs.

Do your due diligence and study the various programs on offer to determine which one of them is best suited to your needs and goals.

4. Undervaluing Cash Flow

Perhaps the greatest oversight when applying for an SBA line of credit is undervaluing cash flow within the applicant’s business. Lenders want to know if your business has revenue to pay its debts. If your business cannot showcase steady cash flow, they may just deny the application; or, in cases where funding is granted, they might impose unfavourable terms on you.

5. Rushing the Application Process

An SBA line of credit is not like fast cash: it requires patience and accuracy. This is one aspect the small business owners rush in when they want to get quick funds. Sometimes hiring in a rush only results in submitting incomplete or incorrect documents, ignoring the crucial elements, or making very bad financial decisions while applying.

6. Unclear Business Plan

A strong, well-thought-out business plan is crucial to the obtaining of an SBA line of credit. Lenders want to see that you have a clear projection for the future of your business and that you have constructed a solid strategy for the use of the funds. If your business plan is hazy and missing some key elements, you will most probably find yourself encountering difficulties during the application process.

It is essential, when applying for an SBA line of credit, to have the business plan fully developed with detailed information about your company’s mission, target market, competitors, growth strategies, and usage of the credit. 

7. Not Understanding the SBA Line of Credit Interest Rate

SBA line of credit interest rates may vary depending on the lender and terms of the loan. Many confused parties result due to a lack of knowledge among business owners on how interest rates work. Generally, SBA lines of credit have variable interest rates tied to the prime rate, but a lender may add in extra fees.

Make sure you know how interest rate is calculated, and how much interest you will have to pay over a period of time, before you go ahead and make an application. 

Conclusion

Applying for an SBA line of credit may be appropriate for small businesses, but certain important pre-qualifications must be met. Avoiding common mistakes such as submitting incomplete documentation, not valuing cash flow in the credit process, or rushing the submission process can help your secure credit better. Know the requirements of the SBA line of credit, make sure your credit history is clean, and have strong backup from business plans attached to your application.

Patience, thoroughness, and having a clear view of your financial condition will smooth the process in securing an SBA line of credit. Take time, practice patience, prepare yourselves well, and soon enough, you’ll have obtained the money needed for a good start for your small business.