5 Most Common Mistakes Small Businesses Make when Taking out a Loan

by | Feb 24, 2021 | Alternative Business Financing | 0 comments

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If you are a small business owner, you will likely know that your business is vulnerable to various financing mistakes. Did you know that unlike larger and more established operations, small business owners are less likely to recover from costly mistakes and errors? It is worth noting that small business owners and entrepreneurs usually make small oversights and either do not identify them or simply ignore them. If your considering a small business loan or other financing, learn some common mistakes many business owners make.

Is your small business in a cash crunch or pinch? Do you require a small business loan or other funding to sort out a financial emergency? Although experts identify poor or ineffective management as the main reason why most small businesses fail, note that ill-timed or insufficient financing is often a close second reason.  

Did you know that 30 percent of small businesses fail because they run out of money? Note that as your small business gradually grows and develops, borrowing may become inevitable. For example, you might have to borrow money in order to expand your existing business operations or to maintain your company’s daily spending.

These are 5 common mistakes you have to avoid when borrowing funds to meet the financial needs of your small business.

1.      Not Having a Comprehensive and Detailed Business Plan

While your credit score and the credit score of your small business are important and reliable indicators of your creditworthiness, note that they are not enough for money lenders, such as banks or credit unions, to establish whether you will be able to repay the money that you are borrowing. It is worth noting that lenders want to comprehensively understand your business operations and how your business makes money.

And this is why you have to ensure that you have a detailed and comprehensive business plan. Ideally, the document should flesh out some crucial details about your business, such as your financial projections. Keep in mind that the lender will be able to evaluate your small business’s profitability and, hence, determine your ability to repay the funds. There is no doubt that having a business plan gives you some peace of mind regarding how your small business will operate while reacting to achievements and setbacks.

You should know that a strong, comprehensive, and well-considered plan demonstrates your business goals and how you plan to achieve them, showing you have thought through all of the details. Note that when you can succinctly explain your business model, services, and products, lenders will be in a much better position to customize a financial product to your specific needs.

2.      Securing the Wrong Type of Financing

You may know that different sources of finance are available for your small business. Also, note that each of these sources might be a better source compared to the other, depending on what you are trying to achieve. You should evaluate the type of loan based not just on the amount of capital you need but also on the kind of loan that will work best for your business.

For instance, purchasing business assets (such as acquiring machinery for expansion) with a bank loan may be a much better option than paying staff salaries using a bank loan. Note that this is mainly because you can easily dispose of the assets and repay your debt in case you fail to produce enough income to meet the payment deadline.

 Did you know that failure to make the best choice can cost your business not only from an interest standpoint but also from a cash flow perspective?

It is best to treat loan applications like purchasing a house or car. While most products tend to look the same, they are certainly different in a few aspects. You should inspect each product and then look closely for any minute differences. Then, choose one that gives your business the most benefits. 

3.      Not Reading the Terms and Conditions Carefully 

Note that in your rush to secure a loan for your business, you might make the mistake of jumping the gun and signing the contract without reading all the terms and conditions of the loan. It is important to read the fine print carefully on any loan offer that you are considering.  

Did you know that failing to read the fine print is among the most common loan mistakes that small businesses make? This can prove very costly for your business. For example, note that some financial vehicles have hidden costs and fees associated with them. Before you sign on the dotted line, you should know whether the interest rate is fixed or variable. 

4.      Not Having a Specific Purpose for the Funds

All lenders like to make investments that they think are viable, so they will have many questions about how you will use the funds. In most cases, banks and financial institutions look for business plans that clearly show estimated growth or some concrete reasons you need in order to spend money to make more money. 

You have to explain to your potential lenders how the funds will help you increase your revenue, putting you in a better position to repay the loan. This is why, before taking the bold step of borrowing funds, it is vital to make sure that you have a list of the specific needs you want to fulfill with the borrowed funds.

If you are transparent and specific about how you will use the loan, it will improve your chances of getting approved. So, whether you need the money to buy new equipment or inventory, you need to be transparent and honest about your plans. 

5.      Not Shopping Around

You should apply the same intensity and effort to your business loan search as you would search for the most suitable vendor or the best product. Did you know that shopping around provides you with the opportunity to compare various loan offers?

For example, you should know who is offering the best interest rate. While having the money to operate and expand your small business is crucial for success, make sure that you take some time in order to shop around for a loan that can get you the best deal and will not create more pressure, especially in the long run.

You should never be in a hurry to borrow funds from any bank or financial institution without conducting detailed research on many other available sources. This is important as it will help you identify which of the financial sources offers you the best terms and conditions.

About Small Business Funding

We are the one stop alternative financing funding source. Regardless if you have bad credit, short time in business, tax liens, judgments, or fast capital needs, we are your solution.

Our philosophy is why work harder when you can work smarter? That’s why Small Business Funding, through our network of financial partners, work with multiple providers on your behalf. Getting you the best rate and terms for your business.

Our network offers you access to quick and easy working capital to meet your individual business needs. We will put together a program to suit your business goals and financial situation, with ease. Why fill out 2, 4, even 6 applications when all you need to do is fill out one?

We recognize that small businesses are the driving force to grow our economy. In good times, as well as the challenging times, business owners need a fast cash flow solution.  Whether you use it for payroll, purchase new equipment, expand inventory, pay taxes, etc. Fact is, it doesn’t matter what you use the funds for, as long as it helps grow your business and increase your revenue!

If your company was turned down by traditional lending sources, such as banks and other commercial lending institutions, Small Business Funding can help.

Join our family – we look forward to serving you. Apply today