Avoid These Common Errors When Working With a Local Lender

Working with a local lender provides business owners an opportunity to create a long-lasting professional relationship. A lender who understands your business, market, and financial history may be able to provide more context around your financing needs and help you prepare for future opportunities.

However, a strong relationship between a borrower and a lender doesn’t just happen. It takes deliberate choices made by both parties. As a business owner, you need to know about some common missteps to avoid when interacting with a local lender.

Why your relationship with a local lender matters

A business owner may initially approach a lender because they need money for equipment, working capital, expansion, or another specific purpose. But the relationship doesn't necessarily end when the loan closes. Over time, your lender may become familiar with your company’s patterns, goals, and challenges.

That doesn't mean an established relationship guarantees approval or better terms. Lenders still have to evaluate creditworthiness, repayment ability, and other applicable requirements. However, open communication and a history of responsible financial management may help establish credibility.

Business finances rarely follow a straight line. When you have an existing relationship with a local lender, they may be more willing to help you navigate unexpected obstacles that hinder growth.

Misstep 1: Waiting until you desperately need money

One of the most common mistakes that business owners make involves waiting to apply for financing until they desperately need a cash infusion. At that point, the business may have fewer choices and less time to compare financing options.

Loan applications typically require a lot of documentation, including financial statements, tax returns, bank statements, business information, and other documentation. Depending on the type and complexity of financing, underwriting and approval may also take time.

Starting the conversation doesn’t mean that you’re required to borrow money immediately. Instead, it may give you more time to understand your options and identify what you need to do to get ready for financing.

Keep in mind that this doesn’t mean you need to walk in with an application every time you want to speak to a lender. If you anticipate an expansion, major purchase, or seasonal cash flow need, bring it up before the expense becomes urgent. Explain what you're planning, how much you estimate it will cost, and when you expect to need the funds.

Misstep 2: Showing up without understanding your numbers

You don’t have to remember every detail about your financial statements before meeting with a lender. However, you should have at least a working knowledge of your numbers. Know your recent revenue, profitability, cash flow, outstanding debt, and major upcoming expenses. You should also understand how much financing you're requesting, what you plan to use it for, and how you expect the business to repay it. Being able to discuss these numbers may help a lender form a positive perception of you and your company.

Strong revenue doesn't automatically mean a business has enough cash to make loan payments. A company may have significant sales while struggling with slow customer payments, high inventory costs, or other working capital demands.

That's why it's important to understand when money enters and leaves your company. A clear picture of cash flow may help you determine whether you actually need financing, how much you may be able to reasonably afford, and what type of financing might be right for your situation.

Misstep 3: Treating the loan officer like a gatekeeper

It’s easy to look at a lender as someone whose only job is to approve or deny your loan application. However, a better approach is to treat the conversation as an opportunity to explain your business and understand the lender's expectations.

Tell the lender what you're trying to accomplish and why you believe financing will help. Ask what information they need and whether there are concerns you need to address before submitting an application. The lender still makes the ultimate credit decision, but a productive conversation may help you better understand the process.

Misstep 4: Hiding problems or surprises

Transparency is key in any solid relationship, including the one that you’re trying to cultivate with a local lender. Your company doesn’t need flawless financials to seek financing. However, when there are unexplained discrepancies or surprises in your documentation, a lender may be less trusting.

A useful explanation should focus on what happened, why it happened, and what the business is doing about it. For example, if a major customer represents a temporary decline in revenue, explain the circumstances and describe any steps you've taken to diversify your customer base. The goal isn't to make a problem sound smaller than it is. It's to give the lender enough context to evaluate the situation accurately.

Misstep 5: Asking for the wrong amount

As part of your conversation, you need to know exactly how much money you need to borrow. Requesting too little financing may leave a business unable to complete the project it borrowed money to fund. That could mean returning to the lender for additional financing sooner than expected or using operating cash to cover the difference.

However, you also don’t want to borrow more than you need. Asking for more than the business may reasonably use or repay may increase interest costs and create unnecessary financial obligations.

Misstep 6: Failing to ask what happens after approval

Getting approved is only one part of responsible borrowing. Before accepting financing, make sure you understand the repayment schedule, applicable fees, reporting requirements, and other obligations associated with the loan.

You should also understand what happens if your circumstances change. Knowing who to contact and what options are available may make it easier to address problems before they become serious.

How to make the most of your local lending relationship

Working with a local lender is a great way to build a relationship that lasts for decades. Ideally, the relationship will be mutually beneficial. Perhaps the most important step in the process is choosing the right lender.

Centrust Bank® has been helping local business owners grow their companies for years. Contact us today for more information.

FAQs

What should I avoid doing when applying for a small business loan with a local lender?

Some pitfalls to avoid may include waiting until you have an urgent cash shortage, applying without understanding your finances, hiding financial problems, or requesting an amount without a clear use for the funds. You should also avoid focusing exclusively on the interest rate without considering repayment terms, fees, and the overall cost of financing.

How early should I talk to a local lender before I actually need financing?

There's no universal timeline, but starting the conversation several months before a planned financing need may provide useful breathing room. Larger or more complex financing requests may require additional preparation and documentation. Talking with a lender early may help you understand the process and identify potential issues before you need the funds.

What financial information should I know before meeting with a local lender?

Be familiar with your recent revenue, expenses, profitability, cash flow, outstanding debt, and major upcoming obligations. You should also know how much you're requesting, what you plan to use it for, and how you expect the investment to benefit the business.

Should I tell my lender about financial problems or setbacks before applying for a loan?

If a setback materially affects your business or ability to repay existing or potential financing, transparency is generally better than withholding important information. Explain what happened, why it happened, and what steps you're taking to address it. Your lender needs accurate information to evaluate the business's financial position.

How much should I ask a local lender to finance?

Ask for an amount based on a realistic estimate of the business's need and its ability to repay the loan. Borrowing too little may leave a project underfunded while borrowing more than necessary may increase costs and repayment obligations. Prepare a detailed estimate of the expenses the financing will cover before settling on a loan amount.

What questions should I ask a local lender before accepting a business loan?

Ask about the interest rate, fees, repayment schedule, collateral requirements, payment frequency, and any ongoing reporting or financial requirements. You should also ask whether the financing structure matches your intended use of the funds and what happens if your financial circumstances change. Understanding the full terms before accepting the loan may help you prevent unpleasant surprises later.