Getting a loan can be the fuel your business needs to reach the next level of success.
However, you need to follow the right steps to get the funds and make sure that the loan you get is right for you. SMECreditpro suggests seven major mistakes to avoid when taking out a loan.
1- Borrowing too little
It is good to be careful not to take on too much debt. However, underestimating how much a project will cost you can leave your business short of cash if unexpected expenses arise.
2- Borrowing too late
You may be tempted to finance your expansion from your cash flow. But investing with your own money could put your growing business under undue financial pressure. You may have to borrow funds quickly, and from a weak position.
3- Focusing too much on interest rates
The interest rate on your business loan is important, but it is not the only thing that matters. Other factors can be just as decisive, if not more so (duration of the loan, repayment method, type of guarantees, etc.).
4- Paying off your loan too quickly
Many business owners want to pay off their loans as quickly as possible in order to get out of debt. While it is important to reduce your debt, doing so too quickly is likely to be costly to your business because you may run out of cash. Instead of spending extra money on paying down your debt, it might be better to invest in profitable growth projects.
5- Not keeping your finances in order
Too often entrepreneurs neglect bookkeeping and other financial tasks, which can have disastrous consequences. It is essential to keep financial records in order, including year-end financial statements. If your records are disorganized, you may not notice problems with your company's performance until it's too late to do anything about it. It can also make it difficult to get a business loan from a banker, not only because you are missing documents, but also because you are demonstrating a lack of management skills.
6- Making a poor presentation to your banker
You see the potential of your project, but you'll get nowhere if you can't persuade your banker. MacKean says that: “too many entrepreneurs are unable to clearly explain their business plan, past performance, competitive advantages and their proposed venture. As a result, they get this answer: No, thank you”.
7- Depend on a single lender
Dealing with only one financial institution may limit your options, especially if your business faces obstacles. This is the principle of diversification "You shouldn't put all your eggs in one basket.