Deciding to borrow money for your business is an important decision. You may be using the money to expand your business or develop a new campaign or project. Whatever is the reason, you must be careful not to commit serious mistakes that can affect your business negatively.
In this article, we’ll talk about the costly mistakes and risks you should avoid when borrowing money for your business. Take time and understand why you should avoid them and what alternatives you have.
Borrowing Money You Don’t Need:
If you don’t truly need to borrow money, don’t. Banks collect interest on business loans along with other types of loans.
If you don’t need huge funds ASAP, borrow only what you need to help your business grow. Paying interest for the money you don’t need is an unnecessary expense.
Depending on One Lender
Depending on a single bank or financial institution can significantly limit your options. If your business hits a bump, that single lender effectively has all the cards against you.
It helps to diversify not only your assets, suppliers, and customer bases but also your lenders and lending relationships. You can use Numo to find great banks and financial institutions by reading their reviews.
Accepting Urealistic Terms:
Your goal is to put your business in better shape. If loan and repayment terms make it worse than before, do not accept. It’s not a worthy tradeoff.
Such unrealistic terms and conditions are difficult to follow, no matter how desperate you are to get the money. At the same time, they may also end up decreasing your chances of improving your business prospects.
And while on this topic, remember to read the fine print for every loan you take. Make sure you fully understand all the terms and conditions of the contract. Ask questions for clarification.
Borrowing Too Late or Too Little:
Borrowing too late often means you’re in a position of weakness. You may have miscalculated your cash flow and its capacity to support your expansion project. Bankers will see this as a weakness, specifically the lack of planning.
It’s better to prepare cash flow projections for the coming year. Visit your banker and discuss your plans and financing needs. That way, you’ll be anticipating the funding before you need it.
As for borrowing too little, it comes from being too careful about how much debt you take. However, borrowing too little will leave your business or project facing a serious cash shortage when unexpected expenses come up.
Paying Back Too Fast:
It’s understandable: you want to pay your loan back fast to be debt-free again. However, doing this too quickly can leave you short of cash, putting your business at a disadvantage. The money you use to pay up debt can be used for more profitable growth projects.
To decide whether you can pay fast or take time, compare your company’s projected return on investment with the interest you are saving when you pay off your loan faster. If investing the cash on other projects is better for your company, consider slowing down your repayment.