As a first-time borrower, it can be challenging to have your business loan application approved. Many business owners make mistakes when applying for their first loan. These mistakes can come back to haunt you. Before applying for a business loan, you need to know the mistakes other business loan recipients have made and learn from them. In this post, we’ll walk you through common loan mistakes that first-time recipients make.
Miscalculating The Funds You Needed
It’s easy to miscalculate how much funds you need to borrow if you just started a business. You could miscalculate the amount your business will need if you’re anticipating any project. Overestimating and underestimating the amount of money you need can be detrimental.
Underestimating the loan amount will cost you indirectly because you won’t have enough funds to make the investments you need to grow your business. Overestimating the funds means you will be paying more interest on a higher balance, which will cost you extra money each month. The best way to avoid these mistakes is to carry out a thorough analysis of your business needs and be realistic in your goals.
Misunderstanding The Lending Cost
Finance can be complex, and it’s difficult to understand the actual cost of a business loan. There are some fees that you should consider before signing and putting your name on the dotted line. Here are just a few of the fees you need to know.
- Origination fee: The price charged for preparing your offer and processing the application. Lenders may charge you a few percent of the loan amount or a flat fee.
- Service fee: Loan administration cost, including the cost of managing the repayments and customer service. This could be billed as a one-time payment or monthly.
Poor Loan Application Timing
There’s no doubt that every business will find itself in a situation they don’t expect at one point. But emergency business loans rarely work out in your interest. You may feel forced to agree to high-interest rates because you don’t have the time to consider your loan options and make the best decision. Setting up a source of emergency funding is one of the best ways to avoid this difficult situation.
Lacking An Actionable Business Plan
Not having a good knowledge of your business finances reduces your chances of getting approval for a business loan. Spending could quickly spiral out of control, and you could be missing a roadmap on where to invest the funds if you don’t have an actionable business plan.
You need to know what you want to accomplish with the funds. Are you using the fund to launch a new product or service? Or do you want to buy inventories for an upcoming busy period? Whatever you want to use the loan for, make sure you map out your goals in detail and analyze the steps you need to take to achieve them.
Missing Payment Deadlines
Most first-time business loan recipients always miss a payment. Some have money, but they forget to make their payments. Some don’t have the money due to some financial burdens. Either way, you need to go the extra mile to manage your business loan.
Getting organized ensures that you always know when a deadline is approaching and that you have the cash for the payment. To avoid missing payments, you can set a reminder to know when your loan payments are due. Doing this will always ensure that you’re aware of when a payment deadline is approaching and prepare funds to cover the payment.
Failure To Communicate Cash Issues
First-time business loan recipients find it scary to interact with their lenders. When they have cash follow issues, they hide it from their lenders, which could land them in more trouble. When you communicate about your cash flow issues with your lender early, you give the lender and yourself more time to work out an alternative loan structure.
For example, if you don’t make enough sales as you anticipated, a long-term business loan might be a good fit for you. However, your interest rate will increase. Keep in mind that moneylenders don’t want you to default. They only make money when you’re able to make your payments.
Acquiring and managing your business loan is tied to good planning. Having a robust business plan will boost your effort. You will be on the way to victory when you take your time to avoid all the mistakes listed above and find the best solutions for your business. Good luck.