Entrepreneurship | Philippines

3 Jan, 2024

Common Mistakes to Avoid When Applying for a Business Loan

A succinct introduction to business loans, highlighting their potential significant benefits when acquired and utilized effectively.

Applying for a business loan can be intimidating, especially if you need more preparation. Avoid making crucial mistakes that could lead to a rejected loan application with this guide to the common pitfalls when seeking small business financing in the Philippines. Seeking funding from banks or financial institutions requires meticulous preparation. Lenders need to vet borrowers thoroughly before approving loans. Unfortunately, many entrepreneurs apply for financing before organizing the business even or adequately understanding loan options fully. However, lenders have stringent applicant screening mechanisms before approving loans. Entrepreneurs risk rejected applications without meticulous preparation – often for predictable, preventable reasons.

Not Having Your Financial Records in Order

When applying for credit, the first requisite is presenting financial statements reflecting business profitability, stability, creditworthiness, and growth potential. Lenders want proof that borrowers can repay loans comfortably through consistent cash flows.

Hence, a common mistake many entrepreneurs commit is providing accurate, complete, and updated records that present the entire financial picture transparently. For instance, submitting last year’s financial statements when the current year shows 30% revenue growth misrepresents profit margins. Some business owners also avoid digitizing paper receipts, which leads to messy, confusing documentation.

Such errors can diminish loan approval chances despite satisfactory actual performance. Investors get skeptical when financial records seem designed to hide shortcomings rather than demonstrate strengths.

Strategies to Avoid This Mistake

  • Maintain orderly financial records with systematic bookkeeping habits without delaying documentation. Consider hiring accountants if struggling with self-preparation.
  • Frequently update statements presenting data at the last quarter. Demonstrate steady maintenance of records.
  • Digitize all receipts, invoices, and other paper evidence electronically through scanning, mobile apps, etc., for tidy record-keeping.
  • Transparently list all assets, operating expenses, revenues, profits, debts, and liabilities accurately. Never misstate financial position.

Ideally, work with reputed accounting firms for periodic audits, tax filing assistance, and record maintenance guidance continually, not just before applying for loans. Updated visibility of actual profit drivers, loss-incurring aspects, and balance sheet elements helps lenders assess borrower stability realistically while guiding business growth decisions.

Providing Inaccurate or Incomplete Information

Loan applications include detailed forms requiring extensive data on ownership structure, operations, facilities, licenses, and other aspects alongside financial statements. Some entrepreneurs present inaccuracies between various documents that raise red flags about overall reliability.

For example, the application form states two years of operations when tax statements reflect five years in business. Similarly, not aligning proposed loan utilization statements made verbally with the submitted application can diminish perceived transparency. Such accidental or intentional inconsistencies diminish investors’ trust in borrower statements. Hence, accuracy and transparency in all documentation and alignment between written and verbal communication are imperative.

Strategies to Avoid This Mistake

  • Carefully match application form data, attached statements, verbal communication, etc., for consistency. Review repeatedly if needed.
  • Verify details like business registration numbers, licenses, and office addresses tally across documents.
  • Explain any legitimate disparities transparently to avoid misinterpretations of willful hiding.
  • Submit all documentation well ahead of application deadlines, allowing sufficient review time for correctness.
  • Develop standardized reporting templates and content checklists for loan applications to avoid repetition of errors.

Accuracy should be an uncompromising focus area when pursuing external funding. While differences can sometimes indicate carelessness instead of deceit, both diminish an entrepreneur’s loan worthiness for lenders. Hence, aligned transparency across communication formats prevents such perception issues.

Not Understanding the Different Loan Options  

The Philippines offers small business owners varied lending options customized to different purposes, scales of financing, and terms–

  • Term Loans – For large-scale, long-term investments like property purchases
  • SME Loans – Specifically designed for small/medium business capital needs
  • Lines of Credit – Provide flexible ongoing finance for working capital
  • Microfinance –Caters to micro-enterprises needing tiny credit amounts

However, many entrepreneurs apply without understanding the categories. For instance, seeking a microloan when requiring capital for manufacturing equipment expansion is unsuitable and will be rejected. Not matching business loan type to funding needs is a grave yet standard error. Failing to recognize limitations in tenure, size, utilization scope, etc., diminishes approval odds despite satisfactory credentials.

Strategies to Avoid This Mistake

  • Research various lending instruments for clarity on categories- commercial banks offer loans on different terms than NGO microfinancing groups.
  • Consult certified financial advisors to determine the most suitable type aligning with short and long-term business plans.
  • Compare options on parameters like interest rates, collateral needs, and repayment structures.
  • Apply specifically for identified best-fit loans instead of whatever financing seems available.

While hunting for business loans seems daunting initially, categorization helps simplify options once entrepreneurs understand product frameworks. Seeking expert guidance is advisable before finalizing decisions too.

Applying Without Meeting the Requirements

While basic applicant eligibility criteria may seem standard across lenders, many financing groups specify additional prerequisites.

For instance, the Development Bank of the Philippines requires SME loan seekers to:

  • Be Filipino citizens doing business for at least three years
  • Have total assets not exceeding PhP100 million
  • Offer appropriate collateral

However, entrepreneurs often need to pay more attention to such stipulations in the urgency to apply quickly or everywhere possible, desiring quicker success. Attention to specific lender thresholds is essential to avoid outright rejection despite satisfying generic lending criteria. Failing to cross-check requirements before applying only creates avoidable hassles through denial and adverse scoring. Repeated rejection also diminishes future lending prospects with financial institutions. Once blacklisted by even smaller lenders, entrepreneurs struggle to get approved subsequently, even after improving their overall standing.

Strategies to Avoid This Mistake

  • Don’t blindly apply at every lender, hoping hurried volume attempts will succeed somewhere.
  • Research each shortlisted financing group’s eligibility norms before applying.
  • Cross-check that you satisfy every stipulated threshold currently instead of seeking premature applications.
  • Submit supporting documents like registration certificates, tax returns, etc., evidencing conformance to requirements.

While urgency is understandable, loan approval is a game of perception. Applications before properly meeting stipulations imply that the borrower needs more financial wisdom or discipline. Hence, patience pays rich dividends ultimately.

Not Having a Solid Business Plan

An extensive business plan covering background, operations, projections, etc., is indispensable when seeking sizable loans. While many entrepreneurs submit plans, inadequate or exaggerated strategies conveying unpreparedness or unrealistic ambitions can thwart approval odds when scrutinized by lenders.

For instance, making exaggerated margin or revenue claims without substantiating market potential or failing to outline risk mitigation contingencies can undermine credibility severely. Half-baked strategies expose entrepreneurs as reckless or clueless. Although monetary projections are theoretically possible, unrealistic implementation plans make ideas seem fantastical rather than ambitiously achievable.

Strategies to Avoid This Mistake

  • Conduct market research before finalizing business expansion goals and associated funding requirement estimates.
  • Chart competitive landscape, target segment penetration plans, etc., in granular detail.
  • Outline contingency planning for various risks like demand shrinkage, supply chain glitches, staffing issues, etc. conveying preparedness.
  • Offer factual reasoning, data-driven logic, and cautious calculations to support financial projections, not fanciful assumptions.
  • Seek expert advisory services from score mentors and industry veterans to formulate feasible plans.

Evaluating business growth ideas requires assessing organizational readiness and market potential besides capital needs alone. Hence, comprehensive planning translating ideas into executable strategies is pivotal for approval irrespective of loan size.

Choosing the Wrong Lender

With varied lenders offering differentiated products, borrowers must seek financing from suitable institutions rather than any available sources. For instance, approaching traditional banks for microloans of Php 50,000 or less when purpose-built microfinancing NGOs serve this segment often leads to rejection.

Conversely, NGOs approving tiny unsecured loans cannot cater to entrepreneurs needing eight-figure warehouse capital. Blind applications without considering loan amount suitability or sector specialization compatibility lead to avoidable frustration. Identifying and approaching lenders catering specifically to financing needs is critical.

Strategies to Avoid This Mistake

  • Categorize shortlisted lenders by parameters like typical loan amount, sectors focused on, tenure flexibility, etc., to determine the ideal fit.
  • Opt for established banks with small business credit expertise spanning decades over unfamiliar fintech lenders to secure prudent terms.
  • Compare aspects like processing times, early repayment options, etc., besides interest rates alone before finalizing the partner.

While options seem abundant, prudent filtering and research help entrepreneurs pick lenders most likely to approve requested application amounts for their niche without unreasonable clauses.

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Frequently Asked Questions (FAQ)

1. What are some common mistakes entrepreneurs make when applying for business loans in the Philippines?

Some common mistakes include failing to manage financial records properly, providing incomplete or inaccurate information, not understanding available loan products, neglecting to meet lender requirements, and needing a comprehensive business plan.

2. What types of business loans are available in the Philippines?

Some loan types available in the Philippines include term loans, lines of credit, equipment financing loans, accounts receivable financing, and purchase order financing. Each serves different capital needs.

3. What key components should a business plan include when applying for a loan?

A business plan should include an executive summary, company description, market analysis, organization and management details, product/service details, marketing and sales strategies, funding requests, financial projections, and supporting documents.

4. What financial records do lenders typically review when evaluating loan applications?

Lenders typically review financial statements like income statements, balance sheets, cash flow statements, and tax returns and filings to evaluate a company's past and current finances.

5. Why should entrepreneurs research and select lenders carefully before applying for loans?

Entrepreneurs should research lenders to find ones focused on their industry, experience level, and borrowing amount. Aligning with compatible lenders willing to finance similar businesses significantly boosts the chances of loan approval.