However, you should minimize the impact of your mistakes, especially when it comes to financing your business. Prior to taking out a loan amount from a financial institution, you should make sure you're aware of how the entire process works. In this post, we'll review common business loan mistakes that first time recipients make. That way you can avoid these pitfalls and ensure that you're prepared for the business loan application and repayment process.
5 Common Mistakes to Avoid as a Business Owner Seeking Business Financing:
1. Missing Payment DeadlinesIt’s not uncommon for a first-time business loan recipient to miss a payment, and it’s not always because they didn’t have the money on-hand. For instance, sometimes loan recipients simply forget to make their payments. Of course, there are also business owners that don’t have the cash on hand to make the payment due to other financial responsibilities. Either way, to responsibly manage your business loan, organization goes a long way. Getting (and staying) organized ensures that you’re always aware when a deadline is looming, and that you have the cash on hand to cover the payment. To make sure you have an accurate assessment of your finances, Quickbooks suggests checking your cash flow statements at least once per month. We also suggest setting calendar reminders so that you know when your loan payments are due.
2. Failure to Communicate Cash Flow IssuesInteracting with a lender, especially when it’s your first time, can be intimidating. That’s why many first-time borrowers will hide cash flow issues from their lenders. This is a big mistake because by the time the business lender finds out about the cash flow problem, you’ll be in a much worse position. However, if you communicate about issues early with your lender, you give yourself and the lender more time to work out an alternate loan structure. For instance, if you have a low credit score or don't make a high sales volume, a short term loan might be a good fit for your business. Although your interest rate may be higher than an applicant with better credit, you could still qualify for a business line of credit or loan with different terms. It's important to remember that small business lenders don’t want you to default. They make money when you make your payments, so communicate with them early and often.
3. Misunderstanding the Cost of the LoanFinance is complicated, and the sheer amount of loan options can make it difficult to understand the true cost of a business loan. Many small business owners only have a rough estimate of how much they’re paying for their loan. Yet, for you to manage your cash flow and make payments on time, you need to know exactly how much money is going in and out of your business’s bank account each month. In addition, if you have a variable rate loan, make sure you understand how much your monthly payment may fluctuate if your rate changes. NerdWallet provides a small business loan calculator that will give you a rough idea of the cost of a business loan. Still, you should consult a financial professional if you’re not sure exactly how much your loan will cost.
4. Miscalculating Funds NeededIf you recently started a business, it’s quite easy to miscalculate how much money you need to borrow. In addition, if you have an upcoming expansion project, you could miscalculate how much your business will require to complete it. However, both underestimating and overestimating the amount of funds you need can be detrimental. Overestimating the loan amount that you need means you’ll be paying interest on a larger balance than you need to, which will cost you extra interest each month. In comparison, underestimating the funds will cost you indirectly because you’ll be unable to make the investments you need to grow your business. Either way, the best way to avoid this mistake is to do a thorough analysis of your business needs and be realistic in your projections. You should also decide what you’ll use the money for in advance so every dollar is accounted for.
5. Not Nurturing Your Lender RelationshipNo one would disagree that building lasting relationships with customers is key to long-term business success. Still, it’s also pivotal as a first-time borrower that you nurture your relationship with your lender. If you’re disorganized or unresponsive, this could be damaging to this relationship. This is a short-sighted mistake. If you’re hoping for long-term success, you’re going to need a good relationship with your lender. Fortunately, this mistake is simple to avoid. Just follow through on your word, keep track of what your lender needs from you, and act professionally.
ConclusionAccording to the Small Business Association (SBA), less than two percent of small business borrowers defaulted on their loan programs in 2016. Still, even though more than 98 percent of small business owners repaid their loans, that doesn’t mean they earned the highest possible return on those loans. Many of them likely paid avoidable expenses through late fees, prepayment penalties, unsuccessful payment fees, and more. To ensure you’re extracting maximum value from your business loan, keep your documents organized, communicate with your lender, and act professionally. If you want access to more business loan tips, be sure to sign up for our free newsletter below:
Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2021.