Four mistakes to avoid when taking out a business loan

Considering applying for a business loan? Read four mistakes you need to avoid when taking one out. 

According to a U.S bank study, around 82% businesses fail to succeed due to cash flow problems. Unfortunate setbacks occur in almost every business, especially in seasonal businesses because there’s at least one season when they run out of money due to limited sales and profits.

A business loan can be the savior in this scenario. However, there are many people who shy away from loans or who tend to make mistakes when applying for a business loan. These mistakes include applying for the wrong kind of loan, using it for unnecessary means or applying with the wrong kind of information and getting rejected.

This may sound strange to some, but such mistakes are common and hence are a major reason why a lot of loan requests are rejected by financial institutions.

Four mistakes to avoid when taking out a business loan

To ensure that you don’t hinder the process, here are four mistakes to avoid when taking out a business loan.

1) Choosing the wrong kind of loan

The most common mistake that businesses make is to go for a loan which doesn’t satisfy their business needs. This is where short term gain becomes a long term pain because ending up with a loan that doesn’t help you will create more problems rather than solving them.

Entrepreneurs often take long term loans when they needed cash financing for a short time period. This leads to paying higher principal and interest rate every month.

Business owners should choose a loan as per their requirements. If your business is facing problems but you’re positive that it’s only for a short period of time then go for short term loans such as a line of credit loan.

In this type of loan, principal is paid at the final end date and only interest rate is needed to be paid on a monthly basis.

In case you want to buy real estate to expand your business then go for home equity loans but keep in mind that you’d be putting your house at stake.

2) Approaching lenders without a business plan

One of the major reasons that lenders refuse to give a loan or don’t agree upon giving huge amounts is because borrowers have no solid business plan to present.

A business plan is like a blueprint that tells the  goals of a business, i.e: how they aim to achieve the goals, what products and services are they working on and where do they see themselves in the future.

This kind of data helps convince lenders to approve a business loan because it helps them gauge the potential of a business. After all, why would a bank want to give loan to a business that may fail in the future?

3) Not paying attention to your buiness’ credit score

The most important component that plays a vital part in getting business loans approved is the credit score.

Your business’ credit score is calculated based on its past history of finances. It gives people or banks an idea if the business will be able to pay back the loan in time or not.

Credit scores need to be given attention to as it is one of the first things a bank will notice when approving or rejecting a loan request.

A score of 650 or more is considered a good score. So if yours is much lower, take steps to improve your credit score before applying for a business loan.

4) Not reading the terms and conditions

Always, always read the small print before signing a loan agreement. Read the terms and conditions thoroughly to know about the interest rate you’d be paying, and the time period given to pay back the loan etc. If you don’t, you could be storing up problems later on. 

Photo by Rob Bye