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7 Deadly Sins in Borrowing Money for Your Business
7 Deadly Sins in Borrowing Money for Your Business
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7 Deadly Sins in Borrowing Money for Your Business

Money254
Doris Kendi
January 28, 2022

There is no easy road to growing a successful business. No matter the size of your business, it will need capital input every now and then. And sometimes, a business loan will be the fuel that you need to propel your business to the next level. 

For example, suppose you need to triple your production in order to meet the market demand. In such a case, you might need a bigger and faster processing machine. But it is not always that a business is able to finance such a machine from its cash flow only. Therefore, taking a business loan is a reasonable option

In the process of applying for such a loan, many entrepreneurs, knowingly or unknowingly, find themselves making these mistakes that could easily jeopardize the future of their company. 

Not Preparing a Strong Pitch to Your Lender

The first impression matters. And your business loan proposal/pitch is probably the first impression a lender will have with your company. So the pitch needs to clearly explain your company’s business plan, past performance, competitive advantages, and proposed project advantages. 

The ideal pitch should be able to convince the lender that your business is ready and able to succeed in your industry, consequently be able to service the loan. 

The most effective business loan pitch must have supporting documents. This confirms that your proposal is based on fact, therefore, boosting your company's credibility. You should have at least:

  • Market studies and figures to support your forecasts and research.
  • Financial data, e.g., subcontractor estimates, projected cash flows, letters of credit, etc. 
  • Testimonials
  • Media reports or other substantial reports

Focusing Too Much on the Interest Rate

Although the interest rate is a vital loan factor affecting your company's cash flow, it should not be your determining factor for business loans. Various other factors are as important, if not more crucial. For example: 

  • The loan term
  • The repayment terms. E.g., is the lender willing to let you pay interest only for a certain period until the project is sustainable? 
  • The percentage of the project or asset cost the lender is willing to finance
  • The loan guarantee, etc.

Also, there are many other items on the loan agreement that you should consider carefully. Read the fine prints. Many entrepreneurs skim through the agreement without paying close attention because they think these are standard clauses written by all lenders. However, each lender has their unique terms and conditions.

Borrowing at the Wrong Time or When It Is Already Too Late

In the spirit of avoiding getting into debt, some entrepreneurs try to finance projects from the operations cash flow. But projects can be expensive and may end up straining your cash flow.  Sometimes, when the available finances can’t handle it anymore, you may need to quickly borrow money to cover the shortage. 

Borrowing at such a point puts you at a disadvantage as it feels like you are at a point of desperation. This is not a good sign to a lender as it may indicate poor planning from the start. 

The ideal situation is to plan beforehand. Ensure to do cash flow projections every year and intentionally account for unplanned projects. This way, you will know if your cash flow is healthy enough to shoulder such plans. If not, you can talk to lenders and have financing lined up for when you need it. 

Depending on One Lender for All Your Loans

It is good to have options. Having a good relationship with only your banker can limit your options and sometimes work at your disadvantage. You do not want only one person holding all your cards at a crucial time in business. 

So diversify your lending options just like you would diversify your investments or customer base. Visit different lenders and keep your options open. 

Borrowing Just Because Someone Is Willing to Lend

Sometimes, lenders will approach you with a loan offer - especially if you have a great credit history. They might even tell you all the right things in the hope that you will do business with them. However, just because it is available, doesn’t mean you should have it.

A business loan is supposed to serve a genuine business need. Taking a loan just because someone is willing to lend can easily knock off your cash flow. The funds might not be used to generate revenue that will be used to pay back the loan. 

Poor In-house Financial Management

With all that is going on in a business - especially a new business - it is easy for you to forget matters of record-keeping or leave all the financial chores to a subordinate. However, financial records are very crucial for a business - especially for a business that borrows or plans to borrow. 

Poorly managed financial records will not only leave you in the dark on how your business is performing, but you also will not be able to present the correct financial picture of your business to the lender. This creates the impression that you lack managerial acumen. 

To avoid this, be on top of your company finances. Ensure to hire a qualified accountant, and even with that, ensure to keep track of the finances personally. 

Borrowing Too Little (Or Too Much)

While it is advisable to be careful how much debt you take on, going too low on a project budget will only leave you struggling and holding on to straws when the money can not successfully complete the project.

On the other hand, overestimating and going above the expected project cost will leave you with excess unspent funds or encourage over-expenditure on funds you are paying interest on.

To avoid either, ensure you make a precise cash flow forecast and account for expected and unexpected scenarios. And then borrow enough to ensure you do not go broke in the middle of the project, neither have too much left after the project is completed. 

WRAPPING UP

In addition to the points discussed above, such as applying for the wrong loan options, applying for multiple loans at the same time, and misrepresenting your financial history are mistakes that could derail the growth of your business. 

As a business owner hoping to take a business loan, it is crucial to educate yourself on the dos and don’ts of business loans so as to avoid falling into any of the above traps.  Before you even start thinking about applying for a loan, ensure that you are well prepared and ready for the next step in your business. 

Doris is a finance professional, freelance writer and SEO expert. She has experience helping businesses of all sizes create content that helps improve their site quality and increase their online traffic. She is a personal finance and wealth creation enthusiast and a frequent contributor to Money254. Visit Doris' personal website to learn more about her work.

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