It’s not an easy world out there for business owners, especially when it comes to borrowing money for their business. We’ve compiled a list of the top three mistakes business owners make when looking to borrow money.
Mistake #1: Borrowing After It’s Too Late
Many Small Business owners make the common mistake of borrowing too late. Many times, growing businesses use their cash flow to finance expensive projects, take on new opportunities and purchase equipment. While this seems like a great idea, it hinders your bank account and puts pressure on your working capital cash flow, the lifeblood of your business.
When you finally realize you need additional working capital often times, it’s already too late. Your bank statements will not reflect your businesses true potential. Your bank balances will be low and your deposits will be few and far between.
Solution—Evaluate upcoming projects and jobs quarterly. It’s best to borrow as soon as you find out you need capital. Whether it’s to see you through a slow period, give your business additional capital during a busy season, or to take on a new project.
In addition to quarterly planning, organize your cash flow projections at the beginning of each year, in quarter one. Be sure to take into account your projected month to month inflows and outflows. This way, you can be sure you’ll get the funding when you need it and prevent the lender from thinking you’ve had poor financial planning.
Mistake #2: Not Borrowing Enough
Being concerned about the amount of debt you take on is of course a smart idea. However, by budgeting a project incorrectly, you can leave yourself facing serious consequences once bills and other expenses come due on top of your project expenses.
Solution—The bottom line is to develop a high-end and a low-end budget. Then borrow enough to ensure you can cover the project expenses even with unforeseen costs and normal business expenses this way, you’ll remain financially stable.
Mistake #3. Focusing Too Heavy On Interest Rate
Yes of course the interest rate is important and you should always be cognizant of things like rate and term. However, if you’re in a crunch and need the cash quickly in order to take on a project, expand, or meet obligations- the benefit of additional cash flow in your bank account will trump the interest rate.
Solution- Before you scrutinize the interest rate, consider these factors:
- Is collateral required? Do you have to pledge personal assets?
- How long will it take to receive funding?
- Is your credit score high enough to warrant a low rate?
- Will you have options to quickly renew your loan if needed?
The bottom line is that borrowers should remember the age old saying that “cash is king.” Without a good cash flow, your business will lack the confidence its needs to seek out new opportunities, meet existing obligations and remain competitive.