According to recent business statistics, 90% of all companies worldwide are small and medium businesses (SMBs). Hence, the World Bank cited them as today’s “backbone” of the world economy this year, 2022.
Unfortunately, one out of twelve businesses shut down every year due to low sales and cashflow . That’s why they borrow money, which is fine, as there are instances when financing is appropriate.
What’s wrong is not keeping in mind the nitty-gritty of taking on debt. Financing is often cited as a monumental task so as to manage whatever you borrow to fuel your company effectively. To pull that off, avoid the following borrowing mistakes.
The best time to take out a loan is when your company’s situation is doing well. It’s the best time to evaluate your contingency plan options. You’re borrowing because you have a strategic plan for it. That’s the real essence of loan capital. It’s supposed to be a tool used to fuel your business’ growth and value, not refinance your company’s undue financial burden.
The worst time to borrow is when your company’s situation is dire and you need to borrow money quickly. This sense of urgency indicates poor planning. Lenders are very aware of it, so they’ll end up having trust issues withnot trusting you. Chances are, borrowing from a position of weakness will give you a high-interest loan, short repayment period, or slower approval.
Lowballing Projects Costs
You’re right to play it safe and avoid overextending financially. However, underestimating the sum required for expanding your business operations can leave your company facing a financial crisis.
What you need to do is to develop a cash flow forecast, including best and worst-case scenarios for each project you’re planning to make. Then, borrow enough funds that ensure project completion. It should be an amount that doesn’t only cover project costs and capital needs but also unforeseen contingencies.
Skipping Other Loan Terms
Avoid assuming that nothing else matters but interest rates. Don’t skim other qualitative items in a loan agreement. Religiously read and think through loan terms, repayment terms, equity financing, collaterals, or default-related matters, to name a few.
Even if it’s just an online personal loan application, understanding a loan agreement comes down to simple awareness. If some parts of the loan agreement are not in your favor, bear in mind that you can always negotiate with your lenders.
In general, staying well-informed and hammering out ensures compliance with your lender and the protection of your business. For more information, you can check out CreditNinja.com loans online.
Weak Loan Pitch
Introducing your business confidently alone isn’t enough to persuade lenders’ to approve your loan application. Lenders care about whether they’ll get their money back. That’s why it’s important to show an information memorandum, the summary of your business plan outlining the investment highlights for the loan company.
Pitching your business should be a balancing act. On the one hand, be passionate about selling your dream. On the other hand, be sensible enough not to lose sight of reality at the same time. More importantly, keep your pitch brief (1-2 mins long), straightforward, and data-driven.
Speeding Up Loan Payoff
Paying off loans too early can sometimes lead to a cash crunch. While it may only be short-term, your company will likely be unprepared when unexpected expenses crop up. As a result, you’ll either use your emergency savings or take out another loan. In times of uncertainty, it’s best to keep the loan and make on-time payments.
In addition, you might still owe lenders even if you already paid your loan off. Many loans are with prepayment penalties. It’s a fee that you have to pay for paying off part of or all your loan ahead of schedule. It’s lenders’ way to recoup the interest they’d lose from your early payoff. If this is the case, you’re better off investing your advanced payments to earn a better rate.
Reliance on One Lender
Don’t let one financial institution hold all the cards if something goes wrong. While you may enjoy discounts or special deals if you borrow from the same lender, it limits your options and puts you at risk if you default on a payment. In effect, your credit score will take a bad hit.
Alternatively, borrow from multiple lenders to minimize risk. Different lenders have different loan types tailored for your current needs, so your options aren’t limited. What’s more, your credit score won’t be affected even if you have multiple loans through different lenders.
There are instances when your denied loan application is not entirely because of your business situation. Lenders have to consider the current economic conditions as well. If the economy is unfavorable for repayments in a timely manner, loan companies won’t lend money. No pun intended, but they will always prioritize their own interests first.