A small business loan is something that can help aspiring entrepreneurs turn their dreams into a reality. Instead of waiting a long time to finance your own company, you can simply borrow money so you can start building your business.
Owning a business is something that a lot of Americans dream of. According to an article published on Business.com, these small businesses are actually at the forefront of the US economy. It is believed that every minute, a new business is created in America. In fact, the article predicted that by 2020, 50% of employees would already be self-employed.
Becoming an entrepreneur is actually easier now because there are so many opportunities to own a business. A lot of people can even start an online company and thrive even as they stay in the comforts of their own home. Not only that, reports reveal that commercial banks are now more lenient when it comes to their lending conditions. According to statistics, 90% of small business loan applications were approved. That means more people have funds to get the finances that will help with their startup businesses.
4 rules to remember before you borrow money for a business
While it may be easier now to get a small business loan, you need to be careful about it. Your debt can drag your company under – at least if you end up failing to pay it back. You need to understand 4 important rules that will help keep your business debt from ruining the potential of your company.
- Know how much you really need. First, is understanding how much you really need to borrow. As much as possible, you need to borrow only what is necessary. You need to be very smart about how you intend to use your small business loan. For instance, if it will be used to buy office furniture, try to make smart choices about what you will buy. It is okay to buy second-hand office tables and chairs if it could save you money. The same is true for cabinets and even that couch that you will use to receive visitors. If you can use an extra room in your house to be your office, you may want to skip renting a space elsewhere. Or you can convert your basement or garage to serve as your office. Find ways to cut back on your startup costs so you do not have to borrow a huge amount on your business loan.
- Know and understand the terms being offered. The second rule that you need to follow is to know the terms of the loan. What is the APR of your loan? How long do you have to pay it back? If you can pay the loan earlier than what is indicated in the terms, will you be charged with prepayment penalties? What fees do you have to pay to process the application of your loan? These are details that you have to understand before you go ahead with the loan. It is not enough that you read it. Make sure you understand every word. The fine print is difficult to read but you have to do it. In case you have questions, do not hesitate to ask the lender.
- Know your options. Another important rule is to know your options when it comes to borrowing a small business loan. There are government backed loans that offer lower interest rates – like those from the Small Business Administration. You can also get help from Angel Investors – private individuals who help fund startup businesses in exchange for part ownership or a low interest loan. There is also the option to borrow from peer to peer lending sites. There are so many options apart from the traditional commercial banks. You need to find out all of these options so you can make a smart choice.
- Know your rights. Lastly, you need to know your rights when it comes to borrowing a small business loan. This rule is sometimes ignored by new entrepreneurs. This is how you can protect yourself from being scammed or being abused by disreputable financial institutions. Find out the laws covering business loans and the rights that you have as a borrower. For instance, you have the right to know the full terms of your loan – including the payments and fees. They cannot hide fees from you and show the real cost only when you finalize your loan application. You need to know about these things so you will not be duped into signing up for something that you are not prepared for.
If you do it correctly, a small business loan can be considered a good debt. But if you are not careful, you might find yourself losing the business you just started.
What to do when your business loans get out of control
According to an article published on Time.com, the Small Business Administration or SBA recently hit their budget limit. That means a lot of people are currently borrowing loans for their business. The current budget limit is $18.75 billion and all of this was already borrowed two months before the fiscal year is over.
This piece of information is not really a big concern for the economy because businesses have the ability to pay back the loan on their own. However, as we kept on saying, this can quickly get out of hand if you are not careful.
In case your small business loan is threatening your company finances, you may want to follow these steps to help get out of a tight financial situation.
- List down all your liabilities. Write down the different loans that you owe and clearly state the balance, interest rate, payment terms, monthly payments, due dates, etc. Include the contact information of the lenders and creditors too.
- Add all the receivables and the income that your business is generating and will generate for the next few months. Compare the income with the debt that you owe. This will help you gauge how grave the financial situation is.
- Make sure you have an emergency fund that can cover your overhead expenses for the next few months. If you do not have it yet, prioritize saving up for it. This will help keep your business afloat despite the amount of small business loan that you owe.
- Decide on a debt relief option. When your emergency fund is set, or while you are saving up for it, you may want to research your debt relief options. This way, you can have a structured payment plan for your loans.
- Communicate with your lenders and creditors. Once you have a plan in place, contact all your creditors and lenders and tell them that you want to use a particular debt solution for all your loans. Feel free to negotiate for better terms and a lower interest rate. Any improvement will do as long as you can pay back what you owe without compromising your business operations.
- Diligently close accounts that you have paid off. Make sure you request and file letters of confirmation that will prove that you already paid off what you owe.
In case you need to borrow again, make sure that you will be smart about it. Your small business loan can give you the finances that will help improve your business but never forget that it can also ruin your company if you are irresponsible with it.
Financial mistakes that can lead to more business debt
Forbes.com revealed that 90% of startups will fail. There are so many reasons why this is so. Sometimes, there is no market for the product or service that is being offered. However, a lot of the companies failing do so because of financial reasons.
There are a lot of financial mistakes that you can commit that will lead to the demise of your business. Here are some of them.
- Failing to have a financial plan. First of all, you need to have a financial plan. Always. This plan will help you with all your financial targets. It will also allow you to keep track of your assets and liabilities. Make sure that this plan is always updated so it can accurately give you an idea about your current financial position. That way you can use it when making financial decisions.
- Relying on credit for overhead expenses. Another mistake that can lead you to more debt is when you rely on credit cards (or any form of credit) to pay for your overhead expenses. If you find yourself having to borrow money to pay for the expenses that will keep your business going, you need to find out where your profits are going.
- Forgetting to negotiate. Some people may not want to negotiate because it makes them look cheap. Well in your business, this is necessary. The more you can save on expenses, the more profit you will have. Even when you borrow a small business loan, you need to negotiate so you can get the best loan terms.
- Refusing to organize your paperworks. Sometimes, businesses lose money because of problems with documents. Losing a document for a receivable or finding out that you made wrong inputs in your paperworks, could lose your money. Being organized with your documents can also help you when it comes to completing financial tasks.