Risk to avoid when borrowing money for business

As your business grows and develops, borrowing might certainly become inevitable. You might need to borrow money: to expand the operations of your existing business, to venture into a new business or just to maintain your company’s day-to-day spending.

In finance, debt is usually granted with expected repayment in modern society and in most cases, of the original sum plus interest.Experts say borrowing money for a business is a big decision with long-lasting financial consequences. They contend that before an entrepreneur applies for a business loan or signs a loan agreement, there is need to be sure they are not making some of the common business borrowing mistakes.

Here are the common pitfalls and the best ways to avoid them

Getting the wrong type of business loan:

Business owners should always match the type of loan to the business purpose. “If you need to finance commercial real estate, for example, you would not take out a business loan with a 12-month term. However, many small business owners take out long-term loans to pay short-term expenses, such as meeting payroll or buying inventory for a big order from a new client.”

Inability to identify your capital needs

According to pharmapproach.com Identifying how much you really need to start-up a business or expand the operations of an existing one is a prerequisite for borrowing money for your business as it prevents you from underestimating or overestimating the sum required.

A well-written business plan can help you develop a projected cash flow which provides answers to the questions that serves as a guide to identifying your capital needs for a business.

Securing the wrong type of financing loan

There are different sources of finance for your business and each of them may be a better source over the other depending on the need you wish to fulfil. You are said to have secured a wrong type of finance when you use the wrong type of credit product for the wrong type of purpose. For instance, acquiring business assets (e.g. buying machinery or land as in the case of expansion) with a bank loan might be a better option than paying salaries with a bank loan.

This is because you can easily sell off the assets and pay up your debt if you fail to generate enough income to meet up with the payment deadline.

Choosing the wrong lender:

Experts say there are more borrowing options for small businesses than ever before, from the traditional sources such as banks and credit unions to alternative lenders and crowd funding websites.

A Management Consultant,says, “Don’t rush into the borrowing decision. Take the time to assess all of your options before you apply for loans. Then, if you receive loan approval from multiple lenders, carefully compare the offers to make sure you are getting the best possible terms.”

Borrowing more than you can comfortably pay back:

It’s tempting to borrow extra money just to have a cushion, but it’s not always wise. Make sure you can easily pay back any loan you take out by using your most conservative sales estimates. This knowledge not only gives you peace of mind, but also makes lenders more comfortable lending you funds.

Not having any specific problem to solve with the loan

Before applying for any loan or taking the bold step of borrowing money from any available source, you should make sure you have a list of the very specific needs you wish to fulfil with the borrowed capital.if you are going into debt just to finance an extravagant lifestyle. It’s important to consider every business expense or investment carefully.

Accepting unrealistic repayments terms

A business loan is meant to put your business in a better shape and not to leave it in a worse condition. Never be too desperate to accept terms and conditions that are not only difficult to follow but also end up hindering the chances of your business making it to the next level. Always make sure you fully understand the terms and conditions of the contract before borrowing and also ask questions for clarification.

Borrowing less than you need:

When you don’t borrow enough money, before long, you will have to come back to the lender for more money because you have run out of cash. The lender will rightly be concerned that you don’t know how to manage money and will be less likely to lend to you again. If you don’t develop accurate financial forecasts, you are more likely to borrow too little.

Not asking on terms and conditions for the loan

Always ask questions. This will help you eliminate confusions and reach an agreement with the lender or “agree to disagree” with clarity. Never assume that you fully understood the lenders when you never did.

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