Small business owners often seek working capital to help with business growth, refinance existing business debt, or to purchase/update technology or equipment. When you are seeking financing for your small business, there are things you should be aware of to help streamline the process and time period it takes to fund your loan request.

In this article, financial advisors at Excelsior Growth Fund uncovered common pitfalls small business owners face when seeking financing and how to avoid them—from loan documentation to credit score and small business mistakes. By avoiding these pitfalls, you will put yourself in a position to submit a solid loan application for review and approval with a lender that understands your small business.

Pitfall: Not selecting the right lender for your business and industry

There are many financing options available to small business owners. Loan programs are available at the federal, state, and municipal levels. In addition, banks, community lenders, micro-lenders, and online lenders provide small business loans. Knowing your options and understanding the eligibility criteria and requirements for each loan programs will help you make a sound decision when applying for a small business loan.

It is important to select a bank or lender that has experience working with small businesses in your industry. When researching your loan options you may find some lenders have more experience in your industry than others. For example, some lenders work with restaurants, while others find this industry to be too risky.

Pitfall: Not having documentation needed to apply for loan

For each small business loan option available, be sure to review requirements. Ideally, you should be interviewing your potential lender to see if they would make a good partner—someone who will give you and your business the attention and resources it needs. Potential lenders should have transparent rates and terms, and be able to walk you through the application process.

Each lender has their own set of requirements, but some common ones often include:

  • List of owners for each company with 20% or more ownership
  • Description of business; executive summary of business plan
  • Detail of loan request
  • Last two to three years of federal tax returns for the borrower and related companies
  • Balance sheet and income and expense statement dated within 90 days of your loan request
  • Current accounts receivable and accounts payable aging (dated within 90 days)
  • Income and expense projections for the next two years (monthly figures for the first year, if a new business)
  • Personal financial statement for all owners
  • Last two to three years of personal federal tax returns for all owners
  • Copy of current bank account statements that show the source of cash equity
  • Copy of Picture ID for all owners (driver’s license, passport, government photo ID)

Pitfall: Not staying on top of your credit score

Your credit score is an important variable in your loan application. Credit represents your ability to borrow money with the promise to pay it back. Understanding how your credit score is calculated can help you repair and improve your personal and business credit over time. We reviewed the five categories that matter and their weight on determining your credit score in a previous article.

A low credit score is one reason why your loan application might be rejected. Remember to monitor your credit score by obtaining and reviewing your credit report on an annual basis. Also make sure to always pay your bills on time.

Pitfall: Not having sufficient cash flow to repay the loan

Routinely checking the financial health of your small business is critical. In order for your small business to grow successfully, you need to have a full understanding of its financials. There are three main financial statements you should fully understand: the balance sheet, the P&L statement (or income statement) and the cash flow statement. The main difference between the P&L and the cash flow statements is that P&L statements are often created on an accrual basis of accounting and as such revenues reported may not have been collected. Additionally, some of the expenses posted on the P&L are non-cash, whereas the cash flow statement will inform you of how much cash you have available at that specific time period.

For small businesses who have been in operation and generating profits, you will most likely have reinvested some of the profits back into the business (this is called retained earnings). More often than not, companies retain earnings to create growth opportunities such as purchasing new and updated machinery, research and development or to pay down liabilities.

Every business owner should know how to create the three main financial statements and understand what is behind the numbers. This will help you monitor business cash flow and gain access to credit when necessary. If your business does not show adequate cash flow, it will likely have a negative impact on your loan application.

Pitfall: Not applying for right loan type with funding time to meet your needs

It is critical to match the length of the loan term to the use of funds. Do not make the mistake of using a short-term loan with high interest to cover a longer term expense. Some lenders exist to sell you debt, and then more debt to help you keep up with loan repayments. Get the length of the loan term right so you do not get trapped in a cycle of debt.

Also, be aware of the length of time needed from application to when the loan gets funded. Do you have time to apply for a loan that takes 45+ days to approve and fund? Would you be in a better position with a loan that has a quicker turnaround time from application to approval? Ask your lending institution how long the process takes so you can plan accordingly.

Pitfall: Not utilizing your resources

While nobody knows your small business better than you do, professionals do have the knowledge in financial management and business operations that can truly help your business flourish. Applying for a loan can be scary, but there are many small business resources out there that can help you get loan ready. Some financial institutions and business solution centers often will offer you free one-on-one support to help your business grow.

Seeking financing for your small business can be a smooth process if you are aware of common pitfalls that stand in the way of securing loan capital. Knowledge of the lending landscape, including banks or lenders that serve your industry, common loan application requirements, and what can make or break your loan application is a good start.

Steven Cohen
Steven Cohen is president of Excelsior Growth Fund (EGF), which helps New York State small businesses grow by providing streamlined access to business loans and advisory services. Steven has a bachelor’s degree from UC Berkeley and a master’s in public administration from Harvard’s Kennedy School. Follow @excelsiorgrowthfund on Facebook. Excelsior Growth Fund (EGF) helps New York State small businesses grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more at As an affiliate of New York Business Development Corporation ( and The 504 Company (, EGF can also facilitate access to a full suite of alternative financing products.