How to Avoid Mistakes When Applying for Small Business Loans

We can all agree small businesses have been hit really hard with the economic consequences of the Coronavirus pandemic and lockdown. In response, President Donald Trump signed a new  $484 billion coronavirus stimulus package that includes a provision allocating about $370 billion toward loan programs for small businesses. About $310 billion of the funds will go toward replenishing the Paycheck Protection Program, which offers forgivable loans, and $60 billion to the Economic Injury Disaster Loan program (EIDL), which provides disaster assistance loans and grants. 

But experts say that business owners need to avoid common pitfalls and do their homework before applying for the latest funds. CNBC shared some useful tips on how to successfully approach the process and maximize the new opportunity to receive one of these federally-backed loans.

Tips to successfully approach small business loans

1. Be prepared

In order to have the best chance of getting a PPP loan, small businesses need to do their homework. A lack of preparation is one of the most common mistakes that owners made when applying for PPP loans during the first round, says Rob Scott, Great Lakes regional administrator for the SBA.

If you don’t have all your paperwork together and up-to-date when you file — including key documents like your latest tax records and average monthly payroll costs — then you may have your loan application rejected or delayed. 

To file for a PPP loan, you’ll typically need to have the following information and documents: 

  • Business name, address and contact information
  • Company formation documents or details of the business’s legal organization, structure, and ownership
  • 2019 tax returns, as well as the previous two years if available
  • Payroll reports
  • Mortgage or rent documents
  • Documentation of utility expenses
  • Proof your business is active and in good standing
  • Documentation of how the Coronavirus pandemic has negatively impacted your business 

In addition to having the paperwork prepared and ready to go, small business owners should make sure their business credit file is up to date and accurate, says Joe Pascaretta, a small business expert with Dun & Bradstreet. While lenders are not pulling borrowers’ credit scores for PPP loans, it’s important that this information is up-to-date in case small business owners need to seek out other funding sources.

All three of the major business credit bureaus — Dun & BradstreetExperian, and Equifax — compile business credit scores that range from 0 to 100. You can access Experian and Dun & Bradstreet reports for free through Nav or pay a fee to access the reports directly from the bureaus.

2. What re-opening the SBA loan process will look like

When the federal funding for the PPP loans dried up it “flipped the switch off” at the agency and the SBA shut down the application process. That means currently at the SBA, there are not any loans in the queue. 

The SBA doesn’t lend money directly — it guarantees loans provided through SBA-preferred financial institutions, such as banks, microlenders, and even fintech companies like Kabbage. In order to get a PPP loan, small business owners have to apply through a financial institution, which then submits the application to the SBA. 

That said, there may be a pipeline of applications already with lenders, which are going to need to enter those loan requests into the SBA system once it’s re-opened, assuming the new funding legislation passes.

Utah’s America First Federal Credit Union told customers that should the SBA open another round of funding for the PPP loans, they will submit small business applications they have previously received at that time. “If we have notified you that your PPP loan application has been processed or is currently being processed, it will remain in our submission queue in the order in which we received it,” the credit union says.

It’s unclear how quickly the SBA will be able to re-open the PPP and EIDL programs after the legislation is signed into law.

3. Work with the right lender

Not only should small business owners start preparing to file now, but they should be careful when choosing a lender, there has been reports of lots of businesses who are not getting the adequate service from their lender, they put in an application with them and that lender didn’t put it into the SBA system. 

If that’s the case for you, there are other lenders out there that you may be able to work with. While many of the PPP loan applications were filed through large banks, small businesses may find shorter lines and more personalized service if they work with smaller lenders, such as community banks. In fact, the new bill specifically sets aside $60 billion for smaller institutions like credit unions and community banks.

You can find PPP lenders using the SBA’s finder tool, including community banks and credit unions that have facilitated these loans during the initial stage, such as Utah’s America First FCU, Nevada-based Bank of George and Michigan’s IncredibleBank.

In addition to seeking out smaller lenders who may not have as many clients applying for PPP loans, small business owners may also benefit from working with an institution that already has experience with SBA loans. Community banks such as Bank of George and IncredibleBank are among the most active SBA lenders year-round. 

A lot of lenders, big and small, jumped on the chance to be involved with the PPP loans, but many had never dealt with the SBA previously, so they weren’t as knowledgeable about the agency’s processes and procedures, Scott says. That may have caused delays.

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