ExecutiveChronicles | Don’ts When Borrowing Money for Your Small Business | Small businesses are less likely to recover from costly losses and errors than larger and more established businesses and operations. As a small business owner, it’s important to study early on different vulnerable financing mistakes. Thirty percent of small businesses fail because of running out of funds. It can be more difficult to find money, especially in shortfalls. This is where business loans are for.
Inflating income and cutting down expenses
As you apply for a business loan, you are required to fill out an application and provide potential lenders with a summary of your business finances, including your cash flow. It’s easy to think that increasing your income and cutting down your expenses will make you look smart and your business profitable. But really, this will not do you any favors and might even work against you.
Whether you’re applying for a business loan or a personal loan, any mortgage lender has vast knowledge about the industry and can review your bank account transactions and credit scores. If they figure out that any aspects of your business are inflated or minimized, it’s usually a red flag, and they might think you’re being dishonest about something.
You have no reason to be dishonest. It’s always best to be honest about the state of your income and expenses so your lenders can help you find solutions to your problems. Besides, lying can do you worse than being refused. A reputation can spread throughout the mortgage companies, and the lower the chances they can help you. There could also be legal issues in the long run, which can be added to your already-stressful burden.
Borrowing too little and too late
It is only suitable to be careful about your debt, whether personal or business. Although underestimating how much a project will cost you more bad than good to your business and leaving it to encounter further and unexpected cash problems along the way.
You may also find yourself tempted to finance your expansion projects from your business’s cash flow. However, this can bring your business into a negative financial pressure on growing your business and force you to borrow money quickly and impulsively. Doing this from having shortfalls can make your situation worse.
What you can do is always communicate about your cash flow for each of your projects, including both positive and negative potential outcomes. You can then borrow enough money to make sure you can fund your projects and even be ready for unforeseen contingencies. This can also help you work on the capital needed to complete your projects.
You can develop cash flow projections to figure out and communicate your monthly flows for the upcoming year. Talk to your banker or lender to discuss your plans and financing needs so you can plan everything before you even need it.
Failing to communicate cash flow problems
It can be intimidating for a startup business owner to interact and discuss financial things with a lender. This can be why new borrowers hide money problems from their lenders, which does you bad than good. As said earlier, lenders know a lot about the industry, and they will always find out whether you’re not being honest with your discussions. If you communicate about your financial issues, you buy yourself and your lender more time to work out whatever you need to fix. You’re talking to your lender to help you with your problems, not make things worse for you.
If, for instance, you have bad credit scores, it’s better to tell your lender about this so they can come up with another option for you to avail to fit your problems and business at the same time. While your interest rate may be higher than expected, there is still a chance you could qualify for other loan options with different terms.
Paying off your loan too quickly
It’s just right for business owners to pay off their loans as fast as possible so they can finally break free from debt. While it’s still highly important to reduce debt, doing it too quickly can cost your business and shoot your new funding problems. If you’re too in a rush to pay off your debt, this may leave your business short on cash yet again. The money you should be spending on priority projects will just be spent on shortcomings.
Comparing your returns on investment and how much interest you’re saving by paying down your loans is something you can do. If you’re expecting to earn more in investing the money in your business, you have to slow down your pace in paying off your loans.
This is why you should find a lender with whom you’re comfortable building a relationship. With a good lender, you can be honest enough if you have problems, and you can have a rapport that can help with your loans, whether personal or business.
