Obtaining a business loan may be the catalyst that propels your investing in a business to the next level of success.
However, you must prepare yourself and your business to obtain the funds and ensure that the loan is a good fit for you.
Joanne MacKean, Director and Business Centre Manager at BDC in Winnipeg, has lent money to hundreds of firms for equipment purchases, real estate acquisitions, and technology purchases. She observes numerous entrepreneurs committing these typical errors, jeopardizing their business’s future.
1. Borrowing at an inopportune time
You may be tempted to finance expansion projects with cash flow from existing operations. However, financing investments using your own funds may place an undue financial strain on your developing organization. You may find yourself in a scenario where you need to borrow money quickly and from a position of vulnerability.
“When a sense of urgency exists, it typically implies to a banker that there was insufficient planning,” MacKean explains. “It’s frequently more difficult to obtain finance when you’re in that situation.”
Solution—Prepare annual cash flow predictions that include month-to-month inflows and outflows, as well as unusual factors such as anticipated investments. Then, meet with your banker to explain your objectives and finance requirements so that you may secure funding well in advance of when you need it.
2. Inadequate borrowing
You are correct in being cautious about the amount of debt you take on. However, underestimating the cost of a project might land your firm in serious financial trouble if unanticipated charges arise.
Solution—For each particular project, create a cash flow estimate that includes both optimistic and pessimistic scenarios. And then borrow enough money to cover the cost of the project, any unanticipated contingencies, and the working capital required to complete the project.
3. Over-emphasizing the interest rate
While the interest rate on your company loan is critical, it is far from the entire picture. Other elements may be equally, if not more, significant.
- How long is the lender willing to extend the loan?
- How much of the asset’s cost is your lender willing to finance?
- What is the lender’s repayment flexibility? For instance, are you able to pay on a seasonal basis or pay interest just during particular periods?
- What guarantees are you required to provide in the event of a default? Are personal assets required to be pledged?
“There are qualitative aspects in a credit agreement that you must carefully consider,” MacKean explains. “Some entrepreneurs skim over loan terms and conditions, believing them to be legalese or standard terms required by all lenders. However, the reality is that terms and conditions vary significantly between lenders.”
Solution—Shopping around among financial institutions for the most attractive package is critical, bearing in mind the importance of factors other than the interest rate.
4. Repaying your loan prematurely
Numerous business owners desire to repay their loans as rapidly as possible in order to achieve debt freedom. Again, it is critical to reduce debt, but doing so prematurely might be detrimental to your organisation. That is because you may find yourself cash-strapped. Alternatively, the additional funds you’re investing to debt reduction could be better spent on profitable growth initiatives.
Solution—Compare the predicted return on an investment to the amount of interest you will save by repaying your loan sooner than required. Consider slowing down your payback speed if you intend to earn more money investing the money in your business.
5. Failing to maintain an orderly financial situation
It is all too usual for busy entrepreneurs to neglect record-keeping and other financial responsibilities—with potentially fatal results. Maintaining accurate financial records, especially year-end financial accounts, is critical. Financial documents that are disorganised might keep you in the dark about the health of your firm until it is too late to take corrective action. It can also make approaching a banker for a business loan more difficult, as you’ve demonstrated not only a lack of documentation, but also a lack of managerial expertise.
Solution—Be meticulous in maintaining financial records and budget for the services of an accountant. Additionally, consider enlisting the assistance of a financial management specialist to help you get your firm back on track.
6. Making a feeble presentation to your banker
You can see how rational your project is, but you won’t get very far if you can’t convince your lender to support it. According to MacKean, far too many entrepreneurs are unable to articulate their business plan, prior performance, competitive advantages, or projected idea clearly. As a result, a polite “no, thank you” is issued.
Prepare and practise your pitch repeatedly. Concentrate on clearly and persuasively describing your firm and how you intend to use the money you wish to borrow. Bear in mind that a significant portion of your sales work is convincing your banker to believe in your managerial acumen and capacity to establish a strong corporation (and pay back the loan).
7. Reliance on a single lender
Having a partnership with a single financial institution can constrain your options, particularly if your firm encounters a snag. “You don’t want a single lender to hold all the cards in the event of a default,” MacKean argues. “In the same way that you would diversify your suppliers, client base, or personal investments, you should vary your loan arrangements.”