With different financing options on the market, finding the one that’s the right fit for your small business can feel like a daunting task. But remember: nobody is perfect — even the most seasoned entrepreneurs make mistakes. So take the opportunity to learn some of the most common money mishaps before diving in!
A regular mistake that entrepreneurs make when seeking a loan is not spending time on the company’s financials. Banks, other lending organisations and even friends and family need to see up-to-date and comprehensive accounting data in order to determine if a business is secure enough to loan money. Financial records give lenders a snapshot of the current standing of a business, and are a must for any loan application. Before you attempt to seek funds, make sure that you possess documents such as profit and loss projections, cash flow statements, balance sheets, income statements and recent tax returns. (You may also need to provide information on your own, personal financial status). All of this data will help potential lenders see if the business can actually afford a loan, and if so, to what value.
Lack of Clarity on Use of Funds
Another area where owners tend to fall down when applying for a loan is not having a clear idea about how they would use funds. Before you even start to seek out a cash injection, make sure you spend time analyzing if your company really does need additional money, and if so, what exactly the funds would be spent on.
Lending organizations want to see that an entrepreneur plans to spend money on the “right things” — that is, on financing purchases or operations that will impact the business in a positive way and help the company to grow. Show lenders that your reasoning is sound by explaining what additional funds will be used for, and the beneficial reasons behind the spending.
Be aware that lending organizations typically see merit in some of the following plans:
- To pay for products or software developments that will bring in additional sales long term
- To finance equipment
- To purchase real estate
On the other hand, less favorable ways to spend loan funds are paying for fancy office setups, buying non-essential assets or financing ongoing losses.
Applying Too Late
Many business owners also tend to leave it too late to apply for a loan. Rather than waiting until you are desperate for funds (and therefore need to go with any institution that will loan funds, instead of the one offering the best deal), make sure you give yourself plenty of time to explore options. By not being desperate for funds, you will come across as more confident, reliable and trustworthy. This will also have a positive effect on a lender’s decision.
Not calculating your APR.
APR is a figure that tells you the true cost per year of borrowing money and is usually higher than the advertised interest rate. Your APR takes into account the interest rate and compounding effect, and it includes additional fees and charges. It’s important to ask about the APR when comparing loan offers.
Not asking for feedback.
If your financing application strikes out, don’t give up — ask for feedback and make an effort to learn from the process. Most small-business owners who are denied financing get turned down more than once. We recommend politely asking for an explanation of the lender’s decision to see what you can improve for your next attempt.
If the feedback is that your personal or business credit worthiness isn’t good enough to qualify you for affordable financing, develop a game plan for strengthening them before reapplying.
You may still be able to qualify for financing if your credit needs work, but if the costs of borrowing outweigh the benefits you’d receive from that financing, it may be wise to wait to pursue financing until you can put your best foot forward and qualify for a better deal.
No Business Plan
Finally, you need to ensure that you have a solid, current, business plan to submit with your loan applications. The majority of lending organizations won’t even consider lending funds to a business if they can’t read a plan that details the research behind the company, the target client base, the mission statement, goals for the future, estimated sales calculations and profit projections.
A well-researched and detailed business plan will show lenders that you have a road map for the future of the company, as well as an increased chance of being able to pay any loaned funds back in full.
Realize that borrowing money is an important cash management tool. Borrow wisely, deliberately, with a purpose in mind.
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