7 Common Mistakes to Avoid When Borrowing Money for Your Business

7 Common Mistakes to Avoid When Borrowing Money for Your Business

In Finance by Calistus OziokoLeave a Comment

While poor management has been identified as the major reason why most businesses fail, insufficient or ill-timed financing may be seen as a close second reason. 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 order to avoid common mistakes in borrowing money, it is important to manage your existing funds wisely. Listed below are some common mistakes you can avoid when borrowing money to meet up with the financial needs of your business.

Mistake # 1: Inability to identify your capital needs

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.

Read also: How to Identify Your Capital Needs for Your Business.

Mistake # 2: Securing the wrong type of financing

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 fulfill.  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 machineries or land as in the case of expansion) with bank loan might be a better option than paying salaries with 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.

Mistake # 3: Not Shopping Around

Never be in a haste to borrow money from any financial institution without doing an in-depth research on other available sources. This helps you to identify which of the financial sources offers the best conditions.

Mistake # 4: 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 fulfill with the borrowed capital. Apart from assuring lenders that their repayment is assured, it also helps you to attend to the most pressing financial needs of your business and prevent you from making the mistake of spending the loan on irrelevant projects or fulfilling your personal needs.

Mistake # 5: 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.

Mistake #6: Not asking question

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

Mistake #7: Paying your loan back too fast

It is important to reduce debt as a business owner, but doing so too quickly in an effort to become debt free can cost your business a fortune. This is because you may leave yourself short of cash while trying to pay off your debt faster than required. The extra money you are using to pay up more than required might be better invested in profitable business growth projects. However, you need to compare your company’s projected return on investment to how much interest you are saving by paying off your loan faster than required. Consider slowing down your repayment pace if investing the cash will positively affect the growth of your business.

With a specific end goal to stay away from common mistakes in borrowing money, a better understanding of the mistakes outlined above, will enable you to make the best choice that suits your business financial needs at a minimal risk.

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