Avoid Common Mistakes Small Businesses Make When Applying for Loans, According to an SBA Official

Updated: Apr 24, 2020

Avoid Common Mistakes Small Businesses Make When Applying for Loans, According to an SBA Official

Small businesses that have been hit hard by the economic effects of the coronavirus pandemic will get another chance to apply for federally-backed loans once the House of Representatives passes additional funding for EIDL and PPP. But experts say that business owners need to avoid common pitfalls and do their homework before applying for the latest funds being offered by Congress. 

Congress passed a $484 billion coronavirus stimulus bill on Thursday 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 about $60 billion to the Economic Injury Disaster Loan program (EIDL), which provides disaster assistance loans and grants. 

About 70% of small business owners tried to apply for PPP loans and about half filed for EIDL assistance, according to a survey by the National Federation of Independent Business. Of those that applied, about 20% reported that their PPP loan had been approved and funds deposited as of April 17. About 10% reported receiving EIDL funds, according to the NFIB survey.

To maximize the new opportunity to receive one of these federally-backed loans, here’s a look at how to avoid the most common application mistake, as well as some tips on how to successfully approach the process. 

A Common Pitfall: Being Unprepared

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. Any delay that a business owner has in getting their information to their lender so that their lender can turn around and put it into the SBA system is a delay you don’t want.

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 business’s legal organization, structure and ownership

  • 2019 tax returns, as well as 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. 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.

What reopening 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.

Banks are telling 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 you have been notified that your PPP loan application has been processed or is currently being processed, it will remain in the submission queue in the order in which the bank received it.

More importantly though, 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. The bill that passed the Senate on Tuesday has some restrictions on how the new funds are allocated. Unfortunately, we may be looking at a 2+ day turnaround.

Working with the right lender may also help

Not only should small business owners start preparing to file now, but you should be careful when choosing a lender. We’re hearing that there’s a lot of folks who are not getting the adequate service from their lender that they would like — 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 like Byline, Great Lakes Credit Union, and Wintrust. You can also apply via PayPal. 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.

Community banks did very well on the PPP program. We found bigger lending institutions were more likely to be overwhelmed by the sheer number of applicants. That’s partly because there’s no way to streamline submitting applications into the SBA system. Each lender has to upload the applications one by one. Bank of America received more than 370,000 PPP applications. JPMorgan Chase processed more than $14 billion in PPP loans, with another $26 million worth of applications from hundreds of thousands of business still in the pipeline.

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 Byline, PNC, and Wintrust 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. That may have caused delays. Yet we are thrilled that the program will reopen and continue to help those who are struggling. Even though there’s been a backlog, we encourage all small businesses who need it to apply ASAP.

If you didn’t qualify or didn’t apply the first time, then you should absolutely apply for the second round. However, it’s worth noting you can only apply and get a PPP loan once, so if you’ve previously applied and received funding, there’s no need to re-apply.

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