Small businesses face many challenges all the time and even more so due to the COVID-19 pandemic. Experts all over the world say that financing is currently essential for small business survival. However, it’s also important to remember that no matter how desperate your company is for a loan, you must not be hasty. There are many options of financing for small businesses available today. You need to compare them and choose the one that meets your needs carefully. Meanwhile, you should make sure you avoid the most common mistakes that can happen when taking out a loan.
Not Looking Outside of Your Regular Bank
The biggest mistake you can make with small business financing is to look for a loan only from your bank. For that matter, any other big bank won’t be much different. The problem is that getting a bank business loan can be challenging at the best of times. However, during a crisis and economic recession, banks cut down their small business loan origination. This happens because risks increase and banks make their eligibility requirements more stringent in response.
Therefore, small businesses are almost unable to get a loan from any bank right now. It took almost ten years after the global recession of 2008 for small business financing to become easily accessible from traditional lenders. Considering the unprecedented scope of this crisis, it’s impossible to tell how long it will take until banks will again become open with lending to SMEs.
The last time triggered the growth of the online lending industry. And it’s alternative lenders that you will need to look at today as well. However, online lenders are also having a hard time due to the COVID-19 crisis. Many of them stopped loan originations completely. You’ll need to look into every possible financing source, even those you haven’t considered before.
Not Calculating What the Interest Amounts To
Not using a loan calculator before signing on the dotted line is one of the worst mistakes a business owner can make. It doesn’t matter how good the offer seems and how low the APR appears to be. You must know exactly how much the loan will cost you by the time the repayment is complete. Please note that it also doesn’t matter whether you are planning to pay it off early. You should always be prepared for the “worst case scenario”. Therefore, knowing exactly how much the loan will accrue in interest will allow you to determine if you can truly handle this debt. You should also develop a repayment plan once you know the actual cost of the loan. Consider your business plan and projected revenue. Then, be realistic in deciding whether this loan is viable for you.
Skipping Over the Terms & Conditions
The terms and conditions section in any contract is long, written in legalese, and seems to be deliberately misleading. All this is true, but none of it changes the fact that reading it is necessary. Unfortunately, many unscrupulous lenders use tiny loopholes in their T&C to rob you of your money. The best thing you can do to protect yourself is to go through this section with extreme care. If you are struggling to understand some of the points, seek help online. In addition, if some details seem weird to you, be sure to clarify exactly what it all means. All in all, you should only get financing when you are 100% sure of what your rights and obligations are. Also, if the lender doesn’t answer your questions in a straightforward manner and tries to distract you from the point, you should be wary. The number of online loan scams has grown extremely fast in the wake of the recent crisis. Therefore, you can’t be too careful.
Taking Out a Loan You Cannot Repay Early
Small business financing from banks is the most affordable type. Any alternative loan, especially from online lenders, is sure to be expensive. That’s why it’s recommended to use these loans as a short-term financing option only. This is also why it’s imperative to be sure that you can repay this debt early. Even if the cost of the loan will be a little higher, it’s worth it to have a chance of early payment. However, be sure to also check if the early repayment option is free. Some lenders add a fee to it that can be exorbitant.
Focusing on One Type of Financing Only
The traditional way of small business financing is a regular secured loan. However, there are many other financing types available, and you definitely should consider each. For example, equity financing can be very useful for SMEs during a crisis like now. There are options like a business line of credit, merchant cash advance, equipment financing, and working capital loans to name a few. Also, be sure to look for angel investor options and venture capital financing. Crowdfunding is another type you should consider. Moreover, do not forget that you can use several financing options at the same time. However, do this only if you have an effective debt management strategy you are sure of.
Taking Out a Personal Loan for Business
There are both pros and cons to taking a personal loan, but disadvantages definitely outweigh any benefits if you want to use this loan for business. It’s also a thing you need to consider when taking some types of working capital financing from online lenders. Those loans might be tied to your personal credit score. It’s this connection that makes it such a bad financing options for SMEs. Simply put, you need to keep your personal and company credit score separate. Unfortunately, businesses fail sometimes, no matter how hard you try to avoid this. If this happens, you’ll have enough trouble trying to get back on your feet. This task will be much more difficult and can lead to many personal problems if your own credit score is also ruined.
Not Having a Clear Plan for Using the Funds
First of all, many of the best lenders will need to take a look at your plan before approving your loan. Online lenders are much more flexible and can provide you with funding with minimal information. But this doesn’t mean that you shouldn’t have a plan for how exactly you will use the money. This plan is vitally important to develop a payment schedule. This means that having a detailed plan for the funds is a major factor in determining the realistic size of the debt you can handle. Be sure to develop a clear strategy for what you need to use the money for. Then, use a loan calculator to understand how much this kind of loan will cost you and how this should affect your budget planning for the future. These calculations will allow you to see whether you can handle these plans or if they need to be adjusted.
Bottom Line: How to Get the Best Financing for Small Business
You definitely can’t let the pandemic and global economic recession bring your business down. Therefore, securing a small business loan is crucial today. The safest route is to get some type of small business help offered by the government, like a PPP loan. However, if it isn’t possible, you’ll need to choose the loan with extreme care. First, make sure that you’ve researched all your options and that you have a way to pay off this debt. Don’t take unnecessary risks and instead focus on looking for alternative financing.