Business and loans often go together regardless of industry and business size. With so many business loans available out there, it can be daunting for small and medium enterprises to choose the best one. If you’re a newbie to a business loan, this article can help you by showing you the pitfalls you need to avoid when taking out a business loan.
It’s tempting to finance business expansion from just your cash flow. However, paying for investments using your own money can add undue financial pressure on your growing business. You may be forced to borrow money quickly from a position of weakness.
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Urgency may indicate to a banker that you have poor business planning, which makes access to financing more difficult.
The solution is to create cash flow projections for the upcoming year that account for month-to-month inflows and outflows and extraordinary items like planned investments. Next, visit your business loan banker and discuss plans and financing needs so you can line up funding before requiring it.
Borrowing a minuscule amount
While being careful about how much debt you take on is good, low-balling how much project costs can leave your business facing a serious cash crunch if unexpected expenses arise.
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The solution is to develop a cash flow forecast for projects, including optimistic and pessimistic scenarios. Next, borrow enough money to ensure that the project is covered, including unforeseen contingencies and the required working capital to complete your projects.
Focusing on the interest rate
Your business loan interest rate is important, but it’s not the whole story. Many other factors are crucial, including the following.
- The loan term your lender is willing to offer
- The percentage of the cost of your asset the lender can finance
- The lender’s repayment flexibility includes options to pay on a seasonal basis or pay only interest for certain periods.
- The guarantees being asked in the case of default
There are many items in a loan agreement, so consider. Some entrepreneurs will skim over the terms and conditions, believing they’re just legal jargon or basic terms. Terms and conditions differ from one lender to another.
The solution is to shop around among top financial institutions for the most appropriate business loan package, keeping in mind the importance of both the interest rate and the terms.
Paying loan too quickly
Many business owners prefer to pay their loans as quickly as possible to avoid interest and be debt-free. It’s vital to reduce debt but spending too fast can cost your business. That’s because you may end up leaving yourself short of cash. Or the additional money you’re devoting to debt reduction could’ve been spent on profitable growth projects.
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The solution is to compare your projected return on investment (ROI) to the amount of interest you’re saving by paying down the loan faster than originally discussed. If you acquire more profit, you can try investing the money in other business facets. Doing these can slow down your repayment pace.
There you have it. Remember, debt is a reality for all businesses and must not be treated as evil. Your responsibility is to pay on time and use your funds wisely. Choose the right banking partner to get your business loan from, and you’re halfway there.