5 Common Business Loan Mistakes and How to Avoid Them
Starting a business takes time, determination, and money. In fact, business owners spend as little as $3,000 and as much as several million dollars to get their companies off the ground.
Unless you have money saved up to finance your new company, you’re going to need to take out a loan.
This might seem simple on the surface, but business loans can be tough to get. Worse, it’s easy to make mistakes when you’re applying that can cost you down the road.
As long as you know what to expect, you’ll be in good shape. Here are a few of the most common business loan mistakes companies make and what you can do to avoid making them yourself.
1. Not Providing Accurate Information
No matter what types of loans you’re applying for, you’ll need to provide accurate information on your application. This should include your business’s information, contact details, and a complete financial picture for lenders to examine.
Leaving things out of your application or reporting inaccurate earnings for your business can create delays in processing your application in the first place.
When you’re filling out each loan application, take your time. Enter all the necessary information as accurately as possible. If you’re not sure about something, take a break, find out the answer, and fill out the form accordingly.
It’s also important to report your company’s finances accurately. Remember, lenders will look at your finances to decide if they’re willing to give you a loan in the first place.
If you say your finances are stronger than they are and the lender finds out, your application will get denied outright. However, if you report your finances accurately and provide the necessary financial statements backing things up, they’ll be more likely to work with you.
Your finances don’t have to be perfect. You just need to be honest about where your business stands.
2. Not Looking at Different Loan Options
There are many different types of loans out there ranging from long-term standard business loans with difficult requirements to cash loans that are easy to qualify for. The right loan for your business’s needs largely depends on your finances and how you’ll use the money you receive.
According to the experts at this cash loan company, looking at a single loan type isn’t just limiting—it’s a bad idea.
Choosing the wrong type of loan can end up costing you money in the long run. Worse, you risk taking out a loan with use restrictions that make it almost impossible for your company to use the money completely.
The best thing you can do is explore your options before submitting a single application. Look at different loan types, use restrictions, and alternative loan options before you make a decision.
3. Thinking a Low Credit Score Will Disqualify You
When you apply for any type of loan, whether it’s a business loan or personal loan, your credit score can make a huge difference in the terms you receive. The higher it is, the easier it will be for you to qualify for a business loan. However, a low score doesn’t mean you won’t qualify at all.
It just means that you’ll need to shop around and be willing to post collateral to secure the loan.
Collateral can be anything from business equipment to the building itself. It all depends on the type of loan you’re applying for and the items the lender will accept. The more valuable your collateral is, the more money you’ll be able to borrow.
That said, it’s important to choose collateral that you can’t afford to lose. If you default on the loan, the lender will be able to take possession of the collateral to settle your debt. This means you’ll lose it entirely and will have to pay for a replacement out of pocket.
4. Choosing the First Lender You Find
The most common mistake people make when applying for business loans is agreeing to a loan with the first lender they find. This can end up costing you thousands of dollars over the life of the loan.
This is because different lenders will view your finances in different ways. One may see your business as high risk and will offer you a small loan at a high interest rate. Another may see your company as low risk and give you a loan at an affordable interest rate.
You won’t know unless you shop around.
Whenever possible, try to get quotes from at least three lenders. This way, you’ll be able to compare the loan terms in detail and choose a lender that works best for your business’s needs and budget.
5. Borrowing the Wrong Amount
Unfortunately, many businesses apply for loans without a clear idea of how much money they need. This leads them to either borrow too much money or too little to accomplish their goals.
When you borrow too much, you risk putting a strain on your business’s budget. The more you borrow, the higher your monthly payments will be, and the more you’ll pay in interest over the loan’s term. If your profit margin is tight, those payments can be almost impossible to make.
When you borrow too little, you risk not having enough money to complete the projects you have in mind. This forces you to take out additional loans which will cost you more in the long run. Remember, the more debt you have, the harder it will be to qualify for new loans in the first place.
Instead, think about how much you truly need before you apply. Let your lenders know the amount you need and see who comes closest to that amount. If they offer you more, only borrow what you need.
Avoid These Business Loan Mistakes
It’s normal for companies to make mistakes when trying to secure financing. This is especially true when you’re just getting started in the industry.
However, as long as you take your time and review these common business loan mistakes, you’ll be able to avoid them easily.
Looking for more tips to help you take control of your company’s finances? Check out our latest posts now.