Common mistakes small businesses make applying for loans

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. 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. 

The Senate passed a $484 billion coronavirus stimulus bill on Tuesday that includes a provision allocating about $370 billion toward loan programs for small businesses. It will go to the House next and is expected to pass as early as Thursday. 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. 

Funded by the $2 trillion coronavirus stimulus package Congress passed in March, both of these loan programs have experienced issues since they opened to the public. The $350 billion in PPP money ran out just days after the Small Business Administration application process opened. Meanwhile, about 4 million businesses have already applied for more than $380 billion in EIDL funds, yet Congress only allocated about $17 billion for the program.

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. 

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, Scott says. “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, says Joe Pascaretta, a small business expert with Dun & Bradstreet. 

“Don’t assume it’s correct,” says Pascaretta. A quarter of small companies who checked their reports say they found errors or key information was missing, according to a 2013 study by the Wall Street Journal, some of the most recent data available.

All three of the major business credit bureaus — Dun & Bradstreet, Experian, 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.

When the federal funding for the PPP loans dried up, Scott says 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,” Scott says. 

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. “There’s probably a ton of lenders out there that have a build-up of applications,” Scott says. 

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, Scott says. The bill that passed the Senate on Tuesday has some restrictions on how the new funds are allocated. “If you’re going to have these set asides…there’s going to be a little more checks in place, so we may not be able to turn it around as fast,” Scott says. “Will that delay it weeks? Probably not. But instead of a day turnaround, you may be looking at a couple days.”

Not only should small business owners start preparing to file now, but they should be careful when choosing a lender, Scott says. “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,” Scott says. 

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, Scott says. 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.

“Community banks did very well on the PPP program,” Scott says. He 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, Scott says. Each lender has to upload the applications one by one. Bank of America received more than 370,000 PPP applications, a spokesman told the Charlotte Business Journal. JPMorgan Chase told CNBC last week that it had 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, Scott suggests. 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.

Yet Scott is hopeful that the program will reopen and continue to help those who are struggling. Even though there’s been a backlog, he encourages all small businesses who need it to apply.

“If someone didn’t qualify or didn’t apply, they should absolutely apply for the second round,” Scott says. 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.

“Overall, it’s a good program,” Scott says. “Hopefully, we’re saving as many businesses and nonprofits as possible during this crisis.” 

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