Business finance borrowers can be their own worst enemy. Business finance borrowers are often never satisfied. When presented with a financing offer to fund their business they often decline believing there is something better. There never is.
Starting and maintaining a business isn’t easy—nor is it cheap. Business costs can easily get into the six figures, and that’s all money spent before you can even open your doors. Even if you’ve got a nest egg to get your business off the ground, it’s entirely possible that you’re going to have to borrow money to cover the rest.
It’s easy to make business finance mistakes, for sure, but it’s also easy to avoid major catastrophe if you know what the warning signs are. Here are mistakes to avoid, and watching out for these missteps can mean the difference between using a loan to build your business, or torpedoing its growth before it has a chance to flourish.
Borrowing More Than You Can Afford
It’s tempting to take out as much money as a lender is willing to provide, especially when you’re just starting out and finances are tight. But borrowing more than you can afford means risking more than just high payments over time. In fact, you could wipe out your profits when you need them the most. Worse yet, you might ruin your personal and company credit in the process.
Borrow judiciously, even if a lender offers you more business finance than you expected. You’re better off borrowing conservatively than taking out too large of a loan. The reason? Interest expenses. The more you borrow, the more you pay in interest. If you don’t have an explicit purpose for the additional funds, you might be overpaying for the money you won’t use. Instead, seek out additional funding only when you need it. You’ll build up your business credit history by paying off your existing loan, which might help you get a better rate for any additional financing you take on.
Relying Too Much on Financing
Not making money through your business is a scary prospect. Most small businesses have a 50-50 chance of surviving past their fifth year of operation, which only adds to the pressure you feel to make your company stand on its own two feet financially. Financing might provide some comfort during lean periods: it lets you keep the lights on, pay your staff, and buy materials. But it doesn’t mean that your company could keep itself afloat on its own—and that’s a frightening prospect.
Taking Out the Wrong Kinds of Loans
All loans are not created equal. Short-term loans are vastly different than long-term loans, and invoice financing is a different animal than small-term loans altogether. The loan you choose matters and can make a world of difference for your company’s financials.
Not Considering All Your Options
Sometimes the best loans don’t come from banks at all. Many municipalities offer small business grants that can help offset some of your startup costs if you’re approved. Other sources of cash, such as loans from friends and family, can also help you get your business off the ground without getting mired in debt. Make sure you’ve set up a clear repayment plan and contract if you pursue money from friends and family, though, to keep your relationship from going sour.
Getting Behind on Payments
Missing loan payments can create a financial death spiral for your business. If you drop the ball on a payment, you can get socked with penalties and fees that make it harder to cover your next payment. Miss that payment, and you might risk more financial trouble to come—including a substantial hit to your credit score. If you think you might have trouble making a loan payment, be sure to contact your lender ahead of time. Most lenders are willing to work with you to set up a repayment plan that works for you, and it’s easier to work these matters out beforehand.
Shopping Around For the Best Offer
Contacting a few different lenders when you require a business loan is probably the worst mistake you can make. Funders don’t like shoppers and will decline your application once they discover you are shopping. They don’t appreciate when, after performing mountains of work to prepare a borrower’s funding, and spending in some cases months of work, the borrower declares he wants to think about the offer. This is seen as a game to play one funder against another and the offer is immediately withdrawn.
No matter what kind of business finance you need, or how much money you need to borrow, make sure that you know your company finances inside and out. Without a complete picture of your small business finances, you’re unequipped to make serious decisions about lending. Once you know your needs, you can go into the loan process armed with all the knowledge you need, and this will help you avoid common pitfalls along the way.
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