Common Mistakes to Avoid with Business Loans
Business financing can be exactly what you need to propel your business forward – but it needs to be used correctly. Even though money coming in may never seem to be a bad idea, there are some situations where opting for a business loan is not the ideal solution. And if it is the right idea, it still needs to be carefully planned and executed. Business loans have added convenience to the lives of many business owners, but knowing when and how to use this convenience is a skill that needs to be learned. We will share with you some of the common mistakes to avoid when considering a business loan.
1. Lack of Research
Before you take out a loan, it is imperative that you do ample research to plan out what you are going to do with it. Consider the differences between a business term loan, a line of credit or a merchant cash advance to determine which type of financing makes the most sense to meet your goals. There are also different companies offering financing, from banks to online lenders and even private money. Your business needs, loan purpose, and overall business financial health will help you determine which of these providers will be able to work with you and what type of interest rate would apply on your loan. Make sure to educate yourself on all the details, fees and rules that come along with getting financing.
2. Taking Out A Loan to Stay Afloat
Most businesses go through ups and downs during their lifetime. Sometimes there are outstanding bills, perhaps unpaid employees, and general cash flow problems. Getting an influx of cash may seem like exactly the right solution, however, a loan could be a short-term Band-Aid that is likely to cause more pain than releif. Sometimes, because there are expenses associated with borrowing, a business can borrow itself into more trouble.
A much better option is to borrow to increase ROI. It is important to calculate how your business financing will increase revenue and bring a positive return. Remember that you will need to pay the loan back with interest, so if you don’t have a clear plan in mind, then a business loan can cause more harm than good in the long term.
3. Not Reading the Fine Print
As you work through your business loan application, you will at some point need to sign a contract. Make sure you take the time you need to properly go through and understand all the details of this agreement. For example, fees, term length, repayment terms, schedules, special clauses, late payment fees, and any special conditions. It is easy to get caught up in the excitement of getting approved for a business loan, but don’t let this deter you from understanding your loan contract completely.
If you have questions, ask the loan officer to explain anything you don’t understand. If they can’t or won’t, don’t sign the loan documents until someone can answer your questions.
4. Borrowing Just for The Sake of It
Just because you are getting an influx of cash does not mean that you need it. If you rush into financing without having a plan for how to use it, you will likely not have a very profitable outcome. You need to account for the interest that needs to be paid back, so a detailed plan of how the loan will be used is critical. For example, building out a patio for a restaurant, installing an ice-cream machine in a convenience store or getting inventory to sell in the coming hot season are all good investments to capitalize on earning opportunities. If you don’t know exactly how the influx of capital will either boost profits or increase the value of your business, it could cost you more than it’s worth.
Business financing has made it easier for businesses to expand and grow but it cannot be a solution to every finance-related problem. If you decide to take out a business loan, you should make sure that it is for the right reasons, and that you have a solid plan in mind to benefit from the finances.