Small businesses require capital to fund important operations like marketing campaigns, paying staff, and buying inventory. Many small business owners turn to loans to get the money they need to keep their businesses running. However, taking out a loan is a big financial decision, and there are some common mistakes that you might make as a small business owner that can add to your debts and might as well slow down your business growth. Here are eight mistakes to avoid when taking out a small business loan.
Not Shopping Around for the Best Loan Option
When you’re a small business owner, every penny counts. You need to be sure you’re getting the best deal on your small business loan, which means shopping around for the best interest rates and terms. Many lenders offer loans specifically for small businesses, so take some time to compare offers before you make a decision. Getting a loan from a community bank can be a great option. Know more.
Not Knowing Your Credit Score
Lenders consider your credit score one of the most important factors when reviewing your loan application. If you don’t know your credit score, how can you ensure you get the best possible interest rate on your loan? Check your credit score before applying for a loan to be prepared to get the best deal possible.
Borrowing More Money Than You Need
It can be tempting to borrow more money than you need when you’re a small business owner because you never know when an unexpected expense will come up. However, it’s only important to borrow the amount of money you absolutely need. Borrowing too much money can put your business in a difficult financial position and might make it difficult to repay your loan.
Not Reading the Fine Print
When taking out a loan, it’s important to read the fine print before signing on the dotted line. There may be some hidden fees or clauses in the loan agreement that you’re unaware of, so it’s always best to be well-informed before making any decisions.
Failing to Plan for How You’ll Repay the Loan
Before you take out a loan, you must have a repayment plan. You should know exactly how much money you need to repay each month and when the loan will be paid in full. This will help you budget for your loan repayments and avoid surprises down the road.
Not Having Collateral
Many lenders require collateral when you’re taking out a small business loan. If you default on the loan, the lender can seize your assets to recoup their losses. You might have difficulty getting approved for a loan if you don’t have any collateral to offer.
Not Understanding the Different Types of Loans
There are many different types of loans available for small businesses, and it’s important to understand the difference between them before you apply. For example, term loans are typically repaid over a set period, while lines of credit can be used as needed and then repaid over time. Make sure you understand the terms of the loan you’re applying for before you commit to anything.
Guaranteeing the Loan Yourself
If you cannot get approved for a loan from a traditional lender, you might be tempted to guarantee the loan yourself. This means that if your business defaults on a loan, you’ll be personally responsible for repaying it. However, this is a risky move that could put your personal finances in jeopardy if your business doesn’t succeed.
Taking out a small business loan can be a great way to finance your business, but it’s important to avoid making common mistakes that could put your business in a difficult financial position. Shop for the best loan terms, read the fine print carefully, and have a repayment plan before applying.