Avoid These Small Business Financing Mistakes Business Owners Make Avoid These Small Business Financing Mistakes Business Owners Make
Debt is a bit more complicated when managing a business. Be sure you avoid these small business financing mistakes that many business owners make. Avoid These Small Business Financing Mistakes Business Owners Make

Having debt is a bit more complicated when it comes to managing a business. Unlike with personal finances, having debt is not necessarily bad. Because of constant fluxes in cash inflows and cash outflows, businesses often find themselves needing to borrow money to carry them through periods of cash shortages. Most businesses and companies operate in a debt and payment cycle to finance their operations and support continued growth. Successful businesses are able to manage and predict these cycles of cash flow to keep their business running smoothly.

But while this is a common business practice, without a proper understanding of borrowing and financing, the process can turn business debt into a financial disaster.

If you are seeking a small business loan to carry your commercial operation, be sure to avoid these financing mistakes some small business owners make.

Borrowing Without Needing To

The first rule of business loans, and frankly any loans, is to not take out a loan if you don’t need it. If you can manage without borrowing, then forgo borrowing as you put yourself both in debt and risk of defaulting, and will need to pay more in the long run in the form of interest.

Business loans aren’t for wants, but a tool for needs such as paying for extra inventory stock during a busy holiday season, opening a new location that will generate increased revenue, or retooling your plant for efficiencies and increased competitiveness. Consider the reasonable return on investment for the expense you plan to use your loan for before taking out a loan.

Not Having Documents Organized

One of the frustrations for many business owners is the process of applying for a loan. It requires a lot of work on the part of the business owner to gather paper documents, verification, and to put together a detailed business plan to convince a lender that the business model is sound. While lenders are currently working to address this market sentiment through some automation and efficiencies, such as allowing business owners to directly upload bank statements online, this is still not available industry wide.

It’s best to still clarify and have all of your needed documents readily available before submitting your application. This will save you time and stress from having to go back and forth with the lender just to finish your application. The approval process will still take a little bit of time for the lender, so if you need money quick, have everything ready beforehand so you can get an answer faster.

Fixating on the Wrong Thing

A common mistake business owners make is fixating on only one of the main terms of the loan. For example, some business owners think only about the total amount they can borrow that they are almost blind to the interest rate of the loan or more often, blind to the cash flow impact that the monthly payments will represent.

These business owners may go from lender to lender, unhappy until they get the full loan amount they seek. But when they do finally get the amount of money they need, they realize a few months down the line, that the monthly payments are not sustainable for their business income. They’ve borrowed too much.

A higher funding amount can often only be obtained by increasing the payments and/or increasing the duration of the financing. For some businesses, this can lead to a crisis because the cash flow impact or cost of their financing becomes an impediment to normal operations. Because revenue has to be allocated towards loan repayments, it can’t be used towards replenishing inventory, payroll, or other business expenses. This can lead to a business owner needing more financing to solve the new cash flow issue created by their borrowing getting the business stuck in a bad borrowing cycle.

The moral here is when taking a small business loan, think about the payments and the cash flow impact of those payments to your business. Payments that are too high can single-handedly drive an otherwise successful business to bankruptcy.

Not Negotiating the Deal

Based on your experience, you might think borrowing and lending is a take-it-or-leave-it type deal, but this is not the case for business loans. In fact, it’s not the case for most loans (auto, mortgage, personal, etc.). Loan terms and costs are negotiable just like any other business deal. Lenders ultimately are competing for your business and don’t make any money unless they close the deal.

So don’t be afraid to ask for better terms, lower fees, or better repayment timelines. Express a willingness to take your business elsewhere if they can’t provide you a better or more tailored deal on your loan. As long as your requests are within reason, lenders may be flexible so they can earn your business. Having a good credit score and other lender offers on hand can help you leverage your term agreements and give you more negotiating power.

Doing It Alone

Lenders are in a sales business and loan officers are sales agents that are paid based on closing a loan with you. Unfortunately, this can lead to some unscrupulous lenders out there trying to make a quick buck off of you, without consideration of the impact towards your business. But there are also good lenders out there who can offer qualified advice and maximize the opportunities available to you. You need an expert financial advisor, not a yes-man. A good lender wouldn’t allow you to make the mistake mentioned above of fixating on the wrong thing and would forewarn you of any implications of your loan.

Do your research first and talk to a few lenders before picking one you trust. Taking the time to find a qualified lender is worth it. Have a lender that asks, “What are your goals?” but gives you an honest answer as to what financial products you actually qualify for based on your credit. Find someone who understands the vast array of different products, available providers, the pros and cons of different choices, and the implications to a particular business situation.

Many industries and businesses likely have some kind of specialized loan product or products, meaning there is likely one available for your business. These industry-specific products most likely have better interest rates and availabilities than a generic loan you can get from walking into a bank. Having an expert advisor who can dig up these opportunities for you can not only help you save time, energy, and stress, but will ultimately help you make a better financial business decision.

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Mike Ouyang

Mike Ouyang

Mike is a PR manager, writer, and content editor for LendingTree focused on creating informative and digestible financial content for the everyday consumer and reader. Mike graduated from College of Charleston and received his MBA from Winthrop University. Follow him on Twitter @MikeOuyangTweet