The majority of small businesses would need to take out some kind of loan at some point. However, borrowing could be risky business, and the wrong option could severely damage not only your business reputation but also your chances of borrowing again.
Below are some of the most common borrowing pitfalls and ideal workarounds for them:
Taking Out a Loan for Operational Costs that Won’t Increase Your Bottom Line
You might be enticed to take out a loan for covering your own salary or your employees’ payroll if your small business is cash-strapped. However, a small business loan provider in Bloomington warns that this is a “Band-Aid solution.” The funds you’re borrowing should further your entire business and not just cover operating costs.
Choosing the Wrong Loan Type
The wrong type of loan could wreak havoc on your business finances, so you have to take ample time to completely understand the best loan type for your current business situation. For instance, credit lines could aid you with cash flow but only in the short term, while loans with longer terms and collateral could be used for buying equipment.
Signing a Loan Without a Clear Understanding of All Costs Involved
Know how different loan terms could affect the overall amount you’ll be paying. For one, a cheaper loan doesn’t automatically mean it’s better. If your business needs cash for a short-term requirement, expect to pay more; if your business needs some capital for a longer term, you might be better off with long-term, low-cost loan. High costs in the long haul could impact your cash flow.
Depending Too Much on Credit Lines and Short-term Loans
Although these funding options are the easiest ones to obtain, they’re the most costly. Essentially, you might be ready for a longer-term loan when you continually roll over your short-term debt and credit lines while still having a permanent outstanding balance.
Although financing is critical, especially for new and small businesses, the reality is that it’s all too often misunderstood. However, knowing the common mistakes could help you get a loan that would ultimately grow or at least sustain your small business.