The Seven Deadly Sins of Taking Out a Loan for Your Company

 The Seven Deadly Sins of Taking Out a Loan for Your Company

Taking on debt too soon or too little might be dangerous for your company.

Obtaining a business loan may be the catalyst your firm needs to go to the next phase of growth.

To get the funds, you must first ensure that the loan is a good fit for your business and yourself.

Director of Business Development at BDC Advisory Services Joan McCann has provided loans to hundreds of companies for things like buying machinery, real estate, and technology. She observes a lot of business owners making these typical errors that endanger the company's viability.

1. Taking out loans too late

It might be tempting for you to use your cash flow to fund your growth plans. However, financing the project with your own funds may place an excessive financial burden on your expanding company. You can find yourself in a precarious situation and in need of a fast loan.

"When there's a sense of utmost importance it usually indicates to the teller that there was poor planning," McCann explains. "When you're in that situation, it's often difficult to get financing."

Solution: Create cash flow predictions for the next year that include unusual things like planned investments in addition to monthly inflows and outflows. Next, organize a meeting with your banker to go over your finance requirements and plans so that you may get the money you need before you need it.

2. Take out too little credit

It makes sense for you to exercise caution when it comes to your debt load. But, if you don't give a damn about project costs, your company may find itself in a tight spot when unforeseen costs crop up.

Solution: Create a cash flow projection that accounts for both optimistic and pessimistic scenarios for each unique project. After that, take out a loan large enough to cover your project's costs as well as unforeseen circumstances and the working capital required to finish it.

3. Focusing excessively on the interest rate

Although it is a significant factor, the interest rate on your company loan is not the complete picture. There may be greater or even equal importance in other things.

How long will the lender allow you to borrow money?

What proportion of the price of your house will your lender finance?

How flexible is the lender when it comes to repayment? Can you, for instance, just pay interest for a particular amount of time or make payments on a seasonal basis?

What assurance are you being requested to provide in the event of a default? Is it necessary to mortgage personal belongings?

According to McCann, "you have to take some qualitative factors in a loan agreement very seriously." Some business owners disregard the terms and conditions of a loan because they believe them to be typical clauses required by all lenders or legalese. In actuality, however, terms and conditions might differ significantly throughout lenders.

Solution: Compare offers from several financial institutions to get the best deal, bearing in mind that aspects other than interest rate are crucial.

4. Quickly repaying your debt

In an attempt to become debt free, many company owners want to pay off their debts as soon as feasible. Once again, paying off debt is crucial, but doing so too soon might hurt your company. This is due to the possibility that you lack funds. Alternatively, you could be better off using the additional cash you are spending on debt reduction on lucrative growth initiatives.

Solution: Determine how much interest you are saving by paying off your loan earlier than required by comparing your predicted return on investment with that amount. Consider reducing the rate at which you repay debt if you anticipate making more money from your business's investment.

5. Not maintaining order in your finances

Entrepreneurs who are very busy sometimes neglect to complete financial responsibilities such as record-keeping, which may lead to potentially catastrophic outcomes. It's crucial to maintain accurate financial records, especially year-end financial accounts. Inadequate financial documentation may prevent you from knowing how well your company is doing until it is too late to make changes. You can find it challenging to contact a lender for a company loan if you don't have the necessary paperwork and management experience.

Solution: Invest the money to employ an accountant and maintain accurate financial records. To get your company back on track, you might also think about hiring a financial management specialist adviser.

6. Giving your lender a poor pitch

Even while you may see the value in your idea, you won't go very far if your lender isn't on board. According to McCain, a lot of business owners find it difficult to communicate their company's competitive advantages, historical performance, business strategy, and planned project. That's a courteous "no, thank you."

Solution: Prepare your pitch and rehearse it often. Make sure to clearly and compellingly describe your firm and the intended use of the borrowed funds. Recall that persuading your lender to have faith in your managerial abilities and capacity to grow a solid firm (and repay the loan) is a significant portion of your sales task.

7. Dependency on a single lender

Having an account with only one financial institution may restrict your choices, particularly if it interferes with your company. "You don't want all the cards to be with the same lender in case everything goes wrong," McCann states. Thus, you should diversify your credit ties in addition to your suppliers, customers, personal assets, and portfolio.

Solution: Have a meeting with other lenders and think about employing other organizations for various kinds of financing items.