5 Critical Mistakes Entrepreneurs Make While Borrowing Business Loans
Scaling your company to new heights generally requires a healthy infusion of business loans to satisfy capital requirements.
However, it’s important to ensure your company is capable of servicing the loan and that it doesn’t fall short or exceed your requirements.
Joanne Mackean is the director of Growth and Transition Capital team at BDC based out of Winnipeg. She has approved business loans to numerous entrepreneurs who needed the money for investments in technology, equipment, and real estate. Here are a few mistakes she often sees entrepreneurs making, which may place their company’s finances at risk.
Not Borrowing Enough
It’s fine to be cautious and conservative with debt. However, don’t make the mistake of borrowing too little since unexpected expenses could easily send your company’s cash flow reeling.
Prepare cash flow forecasts for every project your company undertakes. Always ensure your business loans can cover the project’s capital requirements and other unforeseen contingencies without bringing your business to a standstill.
A lot of entrepreneurs make the mistake of paying back their business loans before the due date. While that’s fine in certain scenarios, it may not always be a wise decision. Several businesses cripple their cash flow on early debt payments, which leave them unable to devote resources to encouraging projects.
Compare the projected ROI with the amount of interest you can save by paying off your loan early. If you feel that the investment might yield more returns compared to the amount of interest saved, reinvest the funds in your business and return to your regular repayment schedule.
Lack of Requisite Financial Knowledge
Many entrepreneurs fail to pay attention to their financial statements, which can snowball into a major issue in the long run. Maintaining accurate financial records and statements is key if you want to judge the performance of your company. Banks are also reluctant to issue loans to businesses that don’t maintain proper records as they see it as a sign of irresponsibility.
Hire a qualified accountant to maintain your financial records. A financial management consultant can also help you discover ways to optimize your company’s finances.
Making Weak Business Loan Pitches
You can’t secure a business loan unless you can convince the bank that you have a solid project plan on your hands. Many entrepreneurs fail to explain their company’s revenue model, project details, competitive advantages, and past performance, which results in their applications getting rejected.
Come to the meeting prepared with facts and figures. Be clear about how the loan will be utilized to fund your project. You should also convince your banker about your management and business skills through your presentation.
Relying on A Single Lender
It’s unwise to be reliant on a single financial institution for your business loans. Just like diversifying your customer base or suppliers or investments, it’s also important to have friendly relationships with multiple lending institutions to minimize risk.
Always have a relationship with the major lending institutions in your area. Not only will this get you better lending rates and friendly terms, but you will also have multiple places to approach for business loans if you’re ever in a tight spot.