4 Mistakes People Make When Applying for a Business Loan and How to Avoid them
BY: MEGAN TOTKA ON FRIDAY, APRIL 21, 2017
One of the ironies of small businesses is that the attention to detail they give to business plans or finished products is often not applied to their finances, especially when they are applying for a business loan. This results in errors in pricing and market research, not maintaining the financial books or failing to file taxes correctly or even on time. Here are the top six mistakes people make when applying for a business loan and how to avoid making them yourself.
Not Shopping Around
It is amazing that some people spend months researching the cost, options, and features of cars and then apply for the first business loan they see when they are seeking a financial infusion for their company. They tend to apply with only the most convenient lender. Failing to shop around can result in signing up for a loan with a higher interest rate than you’d have otherwise been able to get. Others rely on their personal credit cards as a source of money for their business, paying more for the funds than they’d pay in interest for a conventional business loan and making the mistake of mixing personal and business finances. Always seek quotes from half a dozen different business loan lenders before you take out a business loan.
Not Tracking Your Finances Closely
Not tracking your finances closely can impact the loan process in several ways. If you don’t have up to the date financial records on your profits and losses, you could end up with the business equivalent of the “no income, no job, no assets” loan – a variable and high-interest rate compounded by high fees because of the high perceived risk. If you have your financial paperwork in order when you apply but don’t manage the finances closely and make a late payment, your interest rate is likely to spike in addition to the assessed fees. Choosing to have the loan payment automatically debited from your business checking account is a popular way to reduce the risk of this, but now you have to ensure that the account never goes below that critical threshold less you be hit with the same financial penalties.
Not Knowing the Details of the Loan
Too many business owners sign up for a loan based on the low teaser rate while failing to read about the details of the loan. “How could the interest rate have spiked?” “I didn’t know there was a balloon payment at the end.” “I didn’t know the late fee was that high.” “What do you mean there’s a penalty if I pre-pay the loan to pay it off?” Signing up for a loan without knowing all of the details could lock you into a loan with terms contrary to your long term goals.
Not Understanding How You’ll Use the Money
This mistake can affect you in two ways. If the bank doesn’t hear about a planned profitable use for the money, they’ll classify the loan as risky and charge you a higher interest rate. If you don’t have a clear goal for the money and understanding of how this improves your bottom line, such as buying products to sell or equipment to improve your production rate, you may squander what feels like a sudden windfall. Many high-tech startups made the same mistake of financial mismanagement when an influx of investment capital led to hiring without reason and spending on luxury versus the actual business.
If you’re taking out the loan in the hope of keeping the business afloat, you may be better off shifting business models or closing altogether before taking on more debt before being forced to close.
Always shop around for loans based on both the interest rate and the terms of the loan. Understand the terms of the loan before you sign up so you don’t take on legal obligations you cannot keep. Keep your finances in order so that you can get the best terms on your business loan and won’t be penalized by a late or missed payment. And have a clear plan for how you’ll use the money before you take out the business loan.
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