There are a few deadly sins when it comes to borrowing money for your business. If you can avoid these, you’ll be in a much better position to get the funding you need and use it wisely. Here are three of the most important ones to keep in mind.
Borrowing Too Late
Borrowing money is a tricky business. On one hand, you need to make sure that you are getting the best possible terms on the loan. On the other hand, you need to make sure that you are not borrowing too much money and putting your business at risk. Unfortunately, many entrepreneurs make the mistake of borrowing too late in their business’s lifecycle. By the time they realize that they need funding, they are already in a precarious financial position and are forced to accept whatever terms they can get. As a result, they often find themselves buried under a mountain of debt and struggling to keep their business afloat. So, if you are thinking about borrowing money for your business, make sure that you do it as early as possible. That way, you can get the best possible terms and avoid putting your business in jeopardy.
Borrowing Too Little
Borrowing money is a fact of life for most businesses. Whether it’s to cover the costs of expansion, purchase new equipment or simply to tide the company over during lean times, taking out a loan is often necessary. However, there are a few deadly sins that can accompany borrowing. One is taking out too little. It may seem like a safe move to only borrow the minimum amount needed, but this can often put the business in a precarious position. If revenues unexpectedly dip or costs rise, the company may find itself struggling to make ends meet. It’s important to have a bit of cushion when taking out a loan, so that unexpected events don’t put the business at risk. Another deadly sin is borrowing from the wrong source. It’s important to choose a lender that offers reasonable terms and is willing to work with the company if difficulties arise. Borrowing from friends or family can also be problematic, as personal relationships can quickly sour if repayments are not made on time. By avoiding these deadly sins, businesses can ensure that they stay on solid financial footing even when taking out a loan.
Focusing Too Much on the Interest Rate
The first deadly sin of borrowing money for your business is focusing too much on the interest rate. Of course, you want to get the best deal possible, but don’t let the quest for a low rate blind you to the other terms of the loan. In particular, pay attention to the length of the loan, the monthly payment, and whether there’s a prepayment penalty. A low interest rate is no bargain if you’re stuck with a long-term loan that you can’t afford or if there’s a penalty for paying it off early. The second deadly sin is failing to shop around. Don’t just go to your local bank and accept the first offer you receive. Talk to several different lenders, including online lenders, and compare the terms they’re offering. You may be surprised at how much difference there is from one lender to another. The third deadly sin is not having a solid plan for how you’ll use the loan proceeds. Borrowing money should never be done on impulse; it should be part of a well-thought-out business plan. Before you start talking to lenders, know exactly what you need the money for and how it will help your business grow. If you can’t answer those questions convincingly, chances are good that you shouldn’t be borrowing in the first place. Finally, don’t forget that borrowed money has to be repaid with interest. Make sure you have a realistic timetable for doing so and stick to it. Missed or late payments can damage your credit rating and make it harder and more expensive to borrow in the future. By avoiding these four deadly sins, you’ll be in a much better position to make smart decisions about borrowing money for your business.