5 Mistakes First-Time Business Loan Recipients Make
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Still, you want to minimize the impact of your mistakes, especially when it comes to financing your business. Read this post to discover five mistakes that first-time business loan recipients make and how to avoid them.
1. Missing Payment Deadlines
It’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. Sometimes loan recipients just don’t take the deadline seriously enough and forget to make their payment. 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.
2. Failure to Communicate Cash Flow Issues
Interacting 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 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.
Always remember that 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 Loan
Finance is complicated, and the sheer amount of loan options can make it difficult to understand the true cost of a loan. Many small business owners only have a rough idea 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 Needed
If your business is new, 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 your funding needs 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 Relationship
No 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.
According to the Small Business Association (SBA), less than two percent of small business borrowers defaulted on their loans 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.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.