Getting a business loan can be the fuel your business needs to reach the next level of success. Joanne MacKean, a BDC Senior Account Manager in Winnipeg, had loaned money to hundreds of businesses for such projects as buying equipment, real estate and technology. She sees many entrepreneurs making these common mistakes.
1. Borrowing Too Late – You may be tempted to finance your expansion projects from your cash flow. But paying for investments with your own money can put undue financial pressure on your growing business.
2. Borrowing Too Little – You’re right to be careful about how much debt you take on However, low-balling how much a project will cost you can leave your business facing a serious cash crunch when unexpected expenses crop up.
3. Focusing Too Much On The Interest Rate – The interest rate on your business loan is important, but it’s far from the whole story. What loan term is the lender willing to offer? What percentage of the cost of your asset is your lender willing to finance? What is the lender’s flexibility on repayments? What guarantees are being asked from you in the case of default?
4. Paying Your Loan Back Too Fast – Many business owners want to pay back their loans as quickly as possible. Again, it’s important to reduce debt, but doing so too quickly can cost your business. That’s because you may leave yourself short of cash. Or the extra money you’re devoting to debt reduction might be better spent on profitable growth projects.
5. Failing To Keep Your Financial House In Order – Messy financial records can leave you in the dark about how your business is performing until it’s too late to take corrective action. It can also make it difficult to approach a banker for a business loan because not only do you lack documentation, but you’ve also shown a lack of managerial acumen.
6. Making A Weak Pitch To Your Banker – MacKean says too many entrepreneurs are unable to clearly explain their company’s business plan, past performance, competitive advantages and proposed project. The result is a polite “no, thanks.”
7. Depending On Just One Lender – Having a relationship with just one financial institution can limit your options, especially if your business hits a bump in the road, MacKean says. “Just as you would diversify your suppliers or customer base, or your own personal investments, you want to diversify your lending relationships.”
-Business Development Bank of Canada Spring 2015