It is not unusual for a small business to need a loan. This does not necessarily mean the business is struggling financially; the loan might be for expansion.
Irrespective of the reason for seeking a loan, it is important to avoid these common mistakes made by small business owners;
Borrowing for a wrong reason
Loans are great ways to get funding for your business. Nevertheless, you should not abuse its purpose.
Never take a loan unless you have exhausted all other interest-free options, such as the sale of equity, before considering a loan; except if the cost of the loan is better than the available alternatives.
Another mistake some small business owners make is using their business to receive a loan which they then divert for another purpose.
Do not do this, as it could be the end of your business and could also expose you to being charged with fraud.
Not reading the terms of the loan
The borrower and lender sign a loan agreement to document the loan details. It usually contains the principal amount, interest rate, loan duration, collateral and terms.
The reporting requirement is one of the sections of the agreement many small business owners tend to miss when checking the document.
Lenders, for instance, may require your business to maintain specific financial revenue to guarantee the repayment of the money borrowed. When the criteria are not met, the lender may recall the loan.
Make sure you read every line of the agreement, and if you cannot understand any paragraph, employ the service of a lawyer or call the lender to clarify.
Accepting a loan without exploring other options
Small business owners make this mistake when they are in haste to get the cash, probably for the acquisition of a competitor’s business o payment of workers’ salaries.
If possible, do not make this mistake. Always evaluate your account balance to determine when you need a loan. This gives enough time to plan and shop for a lender with the best interest and terms.
You can start with the financial institutions in your area. Friends and other close acquaintances are other sources of information about reputable lenders. Meanwhile, there are online lending platforms which can also consider.
Applying for a loan without a solid business plan
Approaching lenders with the promise of repaying a loan will get you nothing. They need proof and guarantee their money will be repaid with interest by the time the loan is due.
That is why some lenders may request your business plan. It is not unusual for a small business to lack a business plan. They are usually started after the founder has a fantastic idea.
A business plan does not only help you in securing loans, it helps you to better plan your business structure.
A business plan should contain a summary of your company’s mission, a description of the product and services, revenue and operational cost forecast, team and leadership, and location.
A solid business plan would reveal why you need a loan and the expected financials that secure its repayment.
Too many applications
Probably due to the fear of being turned down by a lender, some small business owners apply for loans from different financial institutions. Although nothing is wrong with this provided, you borrowed no more than you needed.
However, this may count against you as other lenders can find out you are in talks with a competitor. They may misinterpret your intention.
Choosing a wrong lender
One of the mistakes you can make especially if you are seeking a loan for the first time, is choosing the wrong lender.
According to National Funding, a small business lender, there are different types of loans tailored for specific stages of a business and industries.
There are lenders with interest and terms that is well-suited for your type of business, while there are others that would be a regret.
Also, applying for a loan with the wrong lender can be a wasted effort. For example, if you are a fashion eCommerce startup business, seeking a loan from a financial institution with sole interest in agricultural businesses would be a waste of time and effort.
It is recommended that you perform thorough research before picking a lender. During your visit to the lender’s office, ask as many questions as possible to ensure they are perfect for your business and purpose.
Disinterest
Lenders are like investors; they will only entrust their money in the hands of someone they are sure would do everything to ensure the repayment.
Visiting a lender with almost no knowledge about what you need the fund for; or understanding of your business can hinder your chances of getting the loan.
You need to express your commitment to the business and present a sound business case for how the money will be used.
