Applying for Commercial Loans – Mistakes Businesses Should Avoid

Applying for Commercial Loans is not for amateurs, as mistakes made in the application process, can cost your business dearly.

 “A good mortgage broker doesn’t just find you a commercial loan—they find you the right commercial loan.”

This saying holds true, especially when it comes to applying for commercial loans. Whether you’re looking to expand your business, buy a property, or finance a large project, getting the right loan can make all the difference. But how do you find that perfect loan? The answer often lies in working with a mortgage broker.

A mortgage broker is like a trusted guide who knows the ins and outs of the lending world. They understand the complex applying for commercial loans process, have relationships with multiple lenders, and know how to find the best deal tailored to your specific needs. 

In this blog, we’ll break down why partnering with a mortgage broker can be one of the smartest decisions you make when applying for commercial loans and how they can help you avoid the common mistakes that many business owners and individuals make when applying for finance.

Applying for Commercial Loans is Way More than Just Signing Papers

A commercial loan is not just a simple transaction. It is a major financial decision that can shape the future of a business. Yet, many business owners treat it like a quick box-ticking exercise. They rush in with half-baked applications, unrealistic expectations, and assumptions that can cost them time, money, and even the approval they desperately need.

Mortgage brokers who specialise in in assisting clients in applying for commercial loans see the same mistakes over and over again. Some of these missteps can delay the process, while others can result in outright rejection. The worst part? Most of these mistakes are completely avoidable.

Understanding where business owners go wrong can make a huge difference in securing the right loan without unnecessary headaches. If you are considering a commercial loan, knowing these common pitfalls will give you a better shot at success, and save you from frustrating setbacks.

What is a Commercial Loan?

A commercial loan is a special type of loan used by businesses. When a business needs money to pay for things like:

• A new building for business related purposes
• Expensive equipment like computers or machines
• Land to expand or build a new project

The business borrows money from a bank or another financial institution. The business promises to repay the loan over time, usually with interest. In simple terms, it’s like borrowing money to grow your business and paying it back later, a little bit at a time.

Why Should You Need To Be Careful About Mistakes When Applying for Commercial Loans?

Getting a loan is an essential step for your business, so it’s very important to do it right. If you make mistakes when applying for a loan, you could:

1. Delay the process and waste time.
2. Lose the chance to get the loan.
3. Increase the costs if things go wrong.

Banks or lenders look very closely at the information you give them. They want to be sure that you will be able to pay the loan back. If you make mistakes in the way you apply or fill out the forms, the bank might decline your loan request.

Even if your business is doing well, small mistakes can make a big difference. It’s like playing a game – you want to make sure you follow all the rules to win. And the rules for applying for a loan are no different. If you know what mistakes to avoid, your chance of getting the loan will be much higher.

Now, let’s take a closer look at some of the most common mistakes people make when applying for commercial loans. Understanding these mistakes can help you make a strong application and get the money you need for your business.

1. Not Filling Out The Application Correctly when Applying for Commercial Loans

When applying for commercial loans, how you fill out the application can significantly affect your chances of approval. A missing field, incorrect information, or misinterpretation of the question can delay the loan, trigger a decline, or require follow-up questions. Banks have stringent requirements, and if your application is incomplete, the process may be unnecessarily prolonged, and you could be viewed as careless or unorganised, which affects your credibility.

How to Avoid This Mistake in Applying for Commercial Loans:

• Carefully read all instructions: Before you begin, make sure to understand each section of the application. Many loan applications come with an instruction manual or guidelines. Read these carefully to ensure you’re filling out the correct information in the right format.
• Double-check personal details: A typo in personal details like your name, date of birth, address, or contact information can raise red flags for the bank. Small errors, such as misspellings, can delay the process.
• Ensure all financial fields are filled out: If you’re asked to submit your income, expenses, or assets, don’t leave anything out. Incomplete financial information can affect the bank’s ability to assess your creditworthiness and ultimately, the success of the loan application.
• Use online tools or guides: Many banks and financial institutions have step-by-step guides to help with applications. Consider using these resources to reduce errors.
• Ask for help from a credit advisor: If you’re unsure about specific sections (e.g., business revenue, assets), consider consulting with a credit advisor to ensure the application is accurate.

2. Not Having Enough Money To Invest Yourself 

How much money do you need to have to get a loan?

One of the key factors a bank looks at when assessing your loan application is your own financial commitment to the project. If you’re asking for a loan to fund an initiative, the bank wants to see that you’re willing to take on some of the risk. Typically, for a commercial loan, you’ll be required to invest between 10% and 30% of the project’s cost, as a down payment or initial investment. Without this, the bank might see the venture as too risky.

How to Avoid This Mistake in Applying for Commercial Loans:

• Plan ahead of time: Start saving for your investment portion early in the process so you’re ready when you apply. If you’re unable to save the full amount, look into other sources, such as business partners or investors, who may be willing to contribute.
• Consider alternative funding options: If you don’t have enough personal funds for the down payment, consider using other means to secure it, such as personal savings, contributions from family, or even crowdfunding.
• Apply for government grants or subsidies: In certain industries, grants or subsidies may be available that can reduce the amount you need to contribute personally.
• Consult with a financial advisor before applying for commercial loans: A professional advisor such as an accountant can help you figure out how much money you should save before applying for the loan, considering both the down payment and other project-related expenses.

3. Not Showing That Your Business is Financially Healthy

Why is it important to show that your business is doing well?

If you’re applying for a business loan, lenders need to see proof that your business is financially stable. This is often demonstrated through your business’s financial history, including tax returns, profit-and-loss statements, and a balance sheet. If your business has been struggling, you may have difficulty convincing the bank that you can repay the loan.

How to Avoid This Mistake:

• Provide detailed and updated financial statements: Banks typically require at least two years of financial data, including tax returns, balance sheets, and profit-and-loss statements. Ensure everything is up-to-date.
• Show how you’re improving financially: If your business has had financial setbacks, show the bank how you’re overcoming them. Have you recently reduced debt, increased sales, or implemented cost-saving measures? These actions demonstrate financial responsibility.
• Provide business projections: If your business is new or just starting your historical financial data may not be strong. However, providing detailed financial projections based on realistic assumptions can show the lender that you have a plan to become profitable in the future.
• Use accounting software or hire an accountant: If your business finances are messy or you’re not comfortable handling them yourself, consider using accounting software or hiring an accountant to organise everything properly before submitting it to the lender.

4. Not Having a Plan for Your Project

Why do you need a plan to get a loan?

Having a clear, structured business or project plan is crucial to receiving a loan. The bank needs to know exactly what you’re going to use the money for, how it will benefit your business, and how it will help you repay the loan. A project plan without clear financial goals or timelines can make you seem unprepared, which is a red flag for lenders.

How to Avoid This Mistake:

• Write a comprehensive business plan: Include sections on the goals of the project, financial forecasts, marketing strategies, timelines, and any risks involved. This plan should reflect a deep understanding of the project’s viability and how it will be executed.
• Include financial projections: Lenders want to see that you know the financial implications of the project. Provide income projections, break-even analysis, and how the loan will help the business grow.
• Provide a timeline: How long will it take to complete your project? Include a realistic timeline for milestones and project completion, demonstrating that you’ve thoroughly thought through the process.
• Outline potential risks: What could go wrong? What are the risks of your project, and how will you mitigate them? Lenders appreciate transparency and will be reassured if you have plans to handle unexpected challenges.

5. Not Having Customers Lined Up

What if you don’t have customers yet?

If you’re asking for a loan to fund a new product or service, the bank will want to see that there’s a demand for it. Without customers, your project may not generate the revenue needed to repay the loan, making it too risky for the bank to approve.

How to Avoid This Mistake:

• Get pre-orders or commitments: If your project involves launching a product, service, or real estate development, secure pre-orders, letters of intent, or customer commitments that demonstrate there’s interest in your offering.
• Show evidence of market research: Provide evidence of your target market’s demand. Include surveys, market analysis, or data showing that your product or service will be sought after by consumers.
• Partner with other businesses or stakeholders: If possible, form partnerships or agreements with other businesses or key clients that can help bring customers to your project.
• Provide sales forecasts: If you can’t secure pre-orders, showing realistic sales projections based on your market research can help paint a picture of future demand.

6. Not Saving Extra Money for Unexpected Costs

What happens if there are surprises during your project?

Many loan applicants underestimate the full costs of a project. Construction delays, rising materials costs, unexpected repairs, or changes in the market can rapidly cause a project to go over budget. Without a contingency fund, you may struggle to complete the project and repay the loan.

How to Avoid This Mistake:

• Build a contingency into your budget: Financial experts recommend saving an additional 10-20% of your project’s total cost to cover unexpected expenses. This provides a cushion if costs exceed expectations.
• Negotiate with vendors: Talk to suppliers or contractors about locking in prices early. You may be able to avoid price hikes later in the project.
• Consider hiring a project manager: For large or complex projects, a dedicated project manager can help track expenses and ensure everything stays on budget.
• Track expenses closely: Regularly review your financial statements and project expenses to identify any overages early.

7. Underestimating the Total Cost of the Project

What happens if you don’t plan for all the costs?

Sometimes, applicants fail to accurately estimate all of the costs associated with their project, leading to insufficient funds once work begins. This could include overlooked costs like permits, taxes, licenses, and legal fees. Without enough funds to cover these additional costs, the project could stall.

How to Avoid This Mistake:

• Get detailed cost estimates: Request detailed quotes from suppliers, contractors, and service providers. Ask them to break down their pricing so you understand exactly what’s included and what’s not.
• Account for all potential costs: In addition to direct costs like materials and labour, remember to factor in administrative fees, taxes, utility installation, insurance, and other hidden costs.
• Budget for emergencies: Unexpected issues always arise in projects. Make sure to budget for things like property damage, legal fees, or unexpected repairs.

8. Picking the Wrong Lender

How do you know which bank or lender is best for you?

Choosing the wrong lender for your loan can lead to higher interest rates, unfavourable terms, or hidden fees. Not all lenders offer the same services, and choosing one that fits your project’s needs is essential.

How to Avoid This Mistake:

• Research multiple lenders: Don’t settle for the first loan offer you receive. Compare loan terms from various banks, credit unions, and private investors to find the best deal.
• Look beyond interest rates when applying for commercial loans: While interest rates are crucial, other factors like repayment schedules, fees, and loan flexibility should also be considered. Sometimes, a slightly higher interest rate may come with better repayment terms.

9. Not Reading the Terms and Conditions Carefully

What are terms and conditions, and why should you care about them?

Signing a loan agreement without understanding the terms can lead to financial surprises later on. You might agree to terms that aren’t favourable, such as high interest rates, hidden fees, or restrictive repayment schedules.

How to Avoid This Mistake:

• Carefully read the loan agreement: Take the time to read every part of the agreement, even if it’s lengthy. Make sure you understand all terms, including interest rates, repayment deadlines, and penalties.
• Ask questions if you’re unsure: If there’s anything you don’t understand, ask for clarification. Don’t hesitate to consult with a lawyer or financial expert if needed.
• Ensure the terms are fair: Compare the terms to other loan offers to make sure they’re competitive. Don’t agree to something unless you’re sure it’s manageable for your project.

Why Are Mortgage Brokers Considered To Be The Best Credit Advisors?

A mortgage broker is someone who assists you in finding the best loan for your needs. Think of them as your guide through the loan process. They know which banks or lenders offer great deals and can save you time and effort. Instead of going to each bank to compare offers yourself, a broker does the hard work for you!

Here’s how a mortgage broker can help:

1. They Know the Best Banks and Lenders

There are many banks and lenders out there, each offering different loans with various terms and interest rates. It can be overwhelming trying to figure out which one is best for you. A mortgage broker has lots of experience and knowledge about different lenders. They know which banks are best for your situation, whether you are buying a home, refinancing, or taking out a business loan. Mortgage Brokers have relationships with these lenders, so they can often get you a better deal than if you went on your own.

Example: If you’re applying for commercial loans, a broker can find you the best deal that suits your budget, even if the bank doesn’t advertise that loan option to the public.

2. They Guide You Through the Loan Process

Applying for a loan can be confusing. There are forms to fill in, documents to collect, and things to remember. A mortgage broker is like a coach who helps you through every step. They will explain exactly what documents you need, help you fill out the forms correctly, and make sure you don’t miss anything important. This is especially helpful if you’ve never applied for a loan or are unfamiliar with the paperwork.

Example: If you’re applying for a business loan, the broker can explain which financial documents the lender needs, such as profit-and-loss statements or tax returns. They’ll make sure you understand everything and help you gather what’s needed.

3. They Can Help You Avoid Mistakes

Even small mistakes in your loan application can cause big problems. A broker can spot errors or things that don’t look right before you submit your application. They can correct mistakes or help you adjust your application to improve your chances of getting approved. If you miss something essential or provide the wrong information, the bank might reject your application or delay your loan approval.

Example: If you forget to include important details about your income or assets, the broker can catch that and make sure everything is correct before sending it to the lender.

4. They Save You Time and Stress

Loan applications can take a long time to process, especially if you’re dealing with multiple banks. A mortgage broker can save you a lot of time by narrowing down the best options for you quickly. They know which lenders offer the most suitable deals, so you don’t have to waste time comparing hundreds of loan offers. This helps you get the loan you need faster, without all the stress.

Example: If you need a loan to buy a business, a broker can quickly match you with lenders who specialise in business loans, rather than you spending weeks researching different types of loans yourself.

Key Takeaways

Applying for commercial loans, home loans, or any other type of loan isn’t always easy. But with the right help, you can avoid making common mistakes. You can increase your chances of getting approved by filling out your forms correctly, showing that your business or personal finances are in good shape, and having a solid business or project plan in place.

A mortgage broker can make this whole process much easier for you. They’ll guide you, help you find the best deal, and make sure everything is in order. Oz Lend is a great place to start if you’re looking for help in applying for commercial loans. Our experienced brokers will help you through every step, ensuring you make the right choices and get the loan that works best for you and your business.