7 Mistakes You Can’t Afford to Make with Business Loans

Leverage your borrowing potential with these financial management tips

Don’t be afraid of debt. Business loans enable business growth and empower you to capitalize on new opportunities.

Like any financial decision, however, it pays to prepare carefully. Poor loan planning can endanger your company’s future. A sound investment starts with knowing your options and developing a clear strategy.

The following are seven mistakes that your business doesn’t have to make.

1. Waiting Too Long to Borrow

It’s tempting to try and finance your company’s growth from your cash savings.

Using your own money for investments can create an unnecessary financial burden on your business. Without ready funds of your own, you may find yourself needing to borrow money quickly and at sub-optimal rates. This can quickly become a compound problem as lenders view these types of loans as indicators of poor planning and will be more reluctant to give you a loan in the future.

Rather, try to borrow out of your business cash-flow. Fitting in loan repayments within your normal cash-in and cash-out.

Financial Management Tip:

Make sure your cash flow projections for the coming year include monthly highs and lows as well as extra items like planned investments. Bring this information with you when you visit your lender, discuss your plans and set up a line of funding before you need it.

2. Not Borrowing Enough

Low-balling your estimated cost is risky. Yes, avoid taking on excess debt, but don’t under-estimate your cash needs.

Unexpected expenses are part of small business ownership. Plan for them and make sure your business comes through with flying colors.

Financial Management Tip:

When planning out project financing, include both optimistic and pessimistic scenarios. Confirm you are borrowing enough money to see your project through to completion – without putting undue pressure on your cash flow.

3. Overlooking the Fine Print

Getting a good monthly payment is important, but it’s only one aspect of a good loan. Other terms can be just as important, or more so, and are critical to understanding the big picture of your financing.

  • What loan term is the lender offering?
  • How much of your purchase cost is the lender willing to finance?
  • How flexible is the lender willing to be on repayments? Some loans allow for repayment on a seasonal basis or may allow interest-only payments for a set length of time.
  • What guarantees are you asked to put up in case of default? Note that some loans can require you to pledge personal assets.

Financial Management Tip:

Don’t skim over the loan agreement. Not all loans are created equal and payments are only part of the picture. Know what you need and shop around until you find it.

4. Overly Aggressive Repayment Strategies

Wanting to become debt-free quickly is understandable. But it’s important to remember why you opted for financing in the first place and avoid spreading yourself too thin.

Putting extra money into paying down your loan means those funds are not available for other, potentially more profitable, projects.

Financial Management Tip:

Compare the savings from accelerated loan repayment, to the money you could make investing those funds in other areas. If the money could be better used elsewhere, aggressive repayment is not a sound financial strategy.

5. Hit and Miss Record Keeping

Running a business means you wear many hats.

Good record-keeping and staying on top of the financial chores can be hard to get to, but letting them slide is costly for your business in the long run. Inconsistent recording leaves you unaware of critical performance markers until it’s too late to make the necessary changes. And, it can make obtaining financing very difficult.

Lenders are wary of leading to businesses that lack documentation and strong managerial skills.

Financial Management Tip:

Be consistent about maintaining financial records and invest in a qualified accountant. If you are positioning for growth, consider getting feedback from a financial management consultant. Their specialized skills and insight may be just what you need to get your business moving forward.

6. Unconvincing Business Loan Proposals

You understand the strengths of your business plan, but can you explain it persuasively?

Remember that ultimately the consultation with your lender is a sales pitch. Win them over by showing you thought out your proposed venture and have a plan that takes into consideration your company’s past performance, market advantages and project scope.

Failing to communicate clearly and effectively can often mean a smaller loan, or no loan at all.

Financial Management Tip:

Do your research, prepare your pitch and practice it beforehand. Zero in on explaining your business clearly and highlighting how you will use the money you want to borrow. Be persuasive!

Your goal is to make you lender confident in both your proposal and your business savvy.

7. Limiting Your Portfolio to One Lender

Don’t put all your financial eggs in one basket.

Diversify your financial portfolio to ensure you have access to the resources you need when you need them. This can be especially important when your business hits a rough patch. You don’t want to be in a situation where one lender is holding all the cards.

Financial Management Tip:

Develop relationships with multiple lenders. Different institutions specialize in different products. Use their knowledge to get the best product for your business.

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By Published On: January 18, 2019Categories: Business Advice