February 21, 2019 | Mason Roberts
If you are an entrepreneur who is looking to start their own business or further their existing businesses success, you will most likely find out that it can become a bit pricey. The prices may vary depending on your plans for said funds and for paying them back, which could make owning your own business seem a bit out of reach if you don't want to pay out of pocket. This is when you might turn to a loan, whether it be traditional or an alternative, non-traditional. Financing your business this way could be a good idea to give you the head start you need. It can open countless doors and possibilities to becoming the successful entrepreneur that all business owners wish to be. The opportunities could start (but not end!) with new technology and up-to-date equipment, or updating to a fresh, new staff of qualified professionals.
With these positive factors in mind, there are also some negatives to consider. Being careful with your financial decisions is an important part of being a business owner. You don't want to get stuck in a downward spiral of debt for what seems like countless exhausting years. This is something that should be taken seriously. That means there should be some serious planning being done. Make sure you know what's expected and what you're really signing up for, and do everything possible to help this process run smoothly.
But just because there are possible negative aspects that could come into play doesn't mean it should deter you. It should only make you cautious - keep you alert and on your toes. It's a good idea to be aware of the business financing missteps many make in the loan process, too. That way, you can learn from someone else's mistakes right off the bat without having to endure the consequences they may have had to work through themselves.
The following are some common business financing mistakes frequently made and how to be proactive in avoiding them.
1.Borrowing More Money Than You Are Able to Pay Back
When applying for a business loan, it's easy to get swept up in the idea of being given an extremely generous amount of capital from a lender. Especially in a startup business, when you are so hopeful for what lies ahead, you can easily overlook the reality of what you are actually able to afford, putting yourself in an extremely tight financial situation. Many borrowers seem to either forget or not realize that, if they own a small business, taking out more money than a lender knows you can afford means the rates will only get higher the more risk involved. It's important to realize that the flat rate offered will most likely grow, not to mention the interest rates, with each risk factor against you.
Think this part of the process over. It is what will affect you in a huge way, come payback dates. Borrow in small amounts, ones you are certain you can pay back. Grow your business as much as possible with this initial loan and gain more revenue. With your business making more money than before, you can then make a decision about whether or not you're interested in taking out a larger loan than before. It's best not to bite off more than you can chew and be cautious of the consequences that can come from said loan.
2. Waiting Too Long When You Need Your Cash Fast
When it comes to owning (and funding) a business, many owners put off borrowing money until the last possible second. And this could be for a couple of reasons. One of them being in denial that they need financial support to help their business flourish the way they hoped it would on the day of their grand opening. This is a common occurrence that happens more often than not. Many business owners find themselves thinking, “why would I get a business loan if I don't need the money right now?” Then, because of their lack of foresight, they end up borrowing from a lender at the last possible moment, when they feel the financial pressure to do so and the decision is not on their terms.
What many business owners must understand is that is much, much easier to receive a loan when your business is in a fairly sturdy financial situation than when it's in its direst need. Applying for a loan at the very last second, while your business is already in turmoil, will only cause issues for you in the long run. Asking for a financial help while your business is not at its best could be a bad idea because the lenders know you are a risk to them. That could make it harder to receive one, or worse, more expensive! The rates will undoubtedly increase, and the terms in receiving one will be more difficult to qualify for. And this is all because you didn't seek a business loan when your company was at the peak of its growth and success. That's why applying for a loan when your business is new and bustling is the best bet for most entrepreneurs in need of business funding.
3. Not Really Considering All Your Viable Options
Business owners tend to assume that the best loan option may be the traditional kind, from a bank, but that is not always the case. There are many other alternative loan options that may be better suited to the unique needs of your business and what you're looking to receive. For example, startup businesses often have a hard time in receiving a traditional loan to get their business to really take off. These business owners may not be aware that that is not their only option, however. They can also turn to a non-traditional loan instead, which in many cases will be a better option. This is because there may not be as many qualifications required of the borrower, as a startup that's still getting off the ground. In this situation, it is an important idea to research your options. Just keep researching, ask different types of lenders all your questions, and you should be able to figure out what your best option is in no time.
4. Not Having a Plan
Having a business plan in set is a great way to start the loan process for both the business owner and the lender. For starters, this is a good idea for the business owner because there is a clear path. Making a plan should give the business owner a good idea of where they want to go with their business, and the lender a better idea of what the borrower would like to do with their borrowed money. When the lender has a clear direction of your plan, it will help them gain a little insight on whether or not you'll be able to pay the loan back. Creating a payment game plan is a good idea for both you and the lender, and should help your chances of receiving the loan you need.
No matter the circumstance, be sure that you are aware of the mistakes that can be made along the way. By avoiding these mistakes, you'll be saving yourself an immense amount of time, money, and struggle. You may be in a rush to get a business loan, but having the patience to do your research is the best idea before jumping into any financial decisions.