For most businesses, at some point in their growth they will need to take out a business loan. Whether you are a startup looking for cash to get your business off the ground, or a company who has been around for years, we could all use a helping hand in the form of money.
When deciding if a business loan is the best for your company, you need to think about every aspect of how it will work. This includes keeping in mind all of the things that could go wrong. Here is a list of the most common mistakes made with business loans and how you can avoid them.
Not Having a Successful Business Plan
When planning to take out a loan it is essential to understand what you will use your business loan for and then plan for how you will pay it back. Without a proper plan on how you will utilize these funds, you could suffer from irresponsible or even accidental overspending.
Not only can the lack of a good plan send you into debt, but it can also prevent you from getting approved for the loan in the first place. Lenders like well-thought-out plans that provide them peace of mind to hand over their money. Walking into a bank without a good plan will most likely lead to you walking right back out with a frown and rejection in hand. Prevent drawing the loan approval process out by formulating a solid plan before reaching out to lenders.
Waiting for Emergency Expenses
Business loans are not just for covering urgent or emergency expenses, such as a seasonal shortfall, or covering building or vehicle repairs. The most successful businesses use business loans to make timely investments in new technology, new locations, new people, and more.
Waiting until you desperately need cash can lead to a rushed planning process. Planning for your business loan should take time as there is a multitude of factors you will need to consider. If you attempt to throw together a plan you risk the bank denying you. As stated before they need to feel comfortable giving you their capital.
Even if a lender does approve your loan on your rushed plan, you may have accidentally developed a plan that is set on course for disaster. Keeping an eye on your finances and doing yearly sales projections should help you see far in advance if you will need to apply for a loan. Begin your plan as soon as the idea of a loan comes up so you are sure you have enough time to create it, and so can be checked over.
Failing to Shop Around
Just as a bad credit score can cost you, taking the first loan offer that comes your way can make your loan unnecessarily more expensive. You can start with your bank or credit union but then look at nearby competitors. Don’t forget to look at offers online, too. Shopping around can also give you a second chance if you are rejected on your first application.
Make sure to look at the fees associated with the loan, as well. Some lenders charge origination fees that can range from 1% to 6% of the loan. These fees are typically deducted from the loan amount, meaning you won’t actually receive $10,000 when you apply for a $10,000 loan. Each lender will have loans that range in interest rates as well.
Keep in mind your plan for your business loan payback and see how the interest on each loan will affect it. Every lender and loan is different so be sure to inquire about the details of each one you can.
Not Thinking About How Much Money you Actually Need
Before you apply for a business loan, you should narrow down the amount of money you actually need and stick to it throughout the loan process. Business loans can help in every facet of your business from inventory to payroll and even helping your business with its prior debt. When calculating how large of a loan you will need, take into consideration every cost you need to cover.
Keep these costs in mind:
- Business Expansion
- Paying Employees
- Purchasing inventory
- Purchasing equipment
Some less than ethical lenders will encourage you to borrow more money than you need because they are looking to make a bigger profit. When you borrow more money than you need, it can be more difficult to pay back, plus you’ll have “dead money” sitting in your bank account which isn’t being helped by inflation. Finding a balance between borrowing too much and borrowing just enough is a balancing act. Don’t be afraid to reach out for help.
Using Loans Irresponsibly
This mistake is one that comes not necessarily from poor planning but from poor decision-making. You may have made a great plan that broke down what you would use your business loan for, but if you veer from your plan it is imperative to readdress your plan. Life can throw changes at you and mistakes can happen but you need to be careful when using money that is borrowed.
Keep your loan plan handy and take notes with every purchase you spend your business loan on. Compare your initial plan with the money you have spent and adjust the rest of your plan accordingly. Just like with a personal budget, your need to stick with a business loan budget, or you can risk running out of money before you expected.
Fearful of falling into these business loan mistakes? With proper planning and strict discipline, you can avoid these issues and have a smooth business loan process. Companies like Get Out of Debt are here to help. With free blogs to help you understand your loans and plans to pay them off, there is plenty of information on personal finances available, should you need some assistance there.
If you have any experience with using business loans, leave a comment and share your most helpful advice in the section below.