Most businesses will, at some point, have to take out loans to finance major purchases. It is crucial that any company performing financing put plenty of thought and planning into its financing to ensure the company does not compromise its own financial health.
Here are a few examples of some of the most common financing mistakes businesses make and what you can do to avoid them.
Borrowing more than the business can afford
This is one of the most common mistakes business owners make with their financing, yet also one of the easiest to avoid. Sure, it’s understandable to be tempted to max out your loan possibilities, especially if you’re in need of new equipment or assets and are otherwise tied up financially. However, it is crucial for the long-term financial health of your business that you carefully analyze your books and determine a) what you’re actually able to afford in the moment and b) what level of risk you’re comfortable taking on financially.
There’s also your own personal financial situation to think of. Depending on the structure of your company, you could ruin your own credit by taking on more debt than your business can withstand.
Relying solely on financing to grow your business
Your business plan shouldn’t rely too heavily on financing. While it can be a useful tool to give you some extra leeway when money gets tight, you shouldn’t be relying on it to grow your company, or to stay afloat as a business.
Falling behind on loan payments
This is often a symptom of borrowing more than your company is able to afford, but there are some circumstances in which companies had good reason to afford they’d be able to make their loan payments but ultimately fall behind anyway. It is absolutely crucial you stay on top of your loan payments—missing payments can destroy your credit, and result in additional fees and penalties that can make it even harder for you to meet your financial responsibilities. The more loan payments you miss, the more damage you’ll sustain, and the harder you’ll find it to obtain financing for your business in the future when you need it.
Failure to investigate all of your lending options
When you’re preparing to finance a new purchase, take some time to shop around and make sure you’re getting the best rate you can find. Different lenders will offer different terms for loans, which may include smaller closing costs and lower interest rates. If you have good credit and a long history of lending, you’ll have even more options available to you than you would if you are a relatively new business owner with a short lending history. Spend some time to do your research—it’ll save you quite a bit of money in the long run.
Taking out the wrong type of loan
There are many different types of loans and loan terms, and the kind of loan you choose will matter a lot. There are big differences between short- and long-term loans, Small Business Association (SBA) loans and the various other types of loans you can find for your company. Spend some time determining which option is best for your business.
For more information about avoiding common financing mistakes, contact us at Patin and Associates.