Six mistakes to avoid when taking out a business loan

March 30, 2021

Six mistakes to avoid when taking out a business loan

March 30, 2020

Six mistakes to avoid when taking out a business loan

A business loan can be invaluable when establishing your business or when an unforeseen setback occurs, but you don’t want a loan to be short-term gain and long-term pain. Here are six common mistakes businesses should avoid when it comes to business and commercial finance.

Mistake #1: Not having thorough, up-to-date financials

Precise, current financial records allow lenders to understand your business’s exact position. If you can’t provide sufficient information, they will either reject your application outright or ask you to spend more time preparing the necessary details. Before approaching a lender, get your books up to date and prepare reports such as:

  • balance sheets
  • profit and loss statements,
  • recent business activity statements (BAS)
  • Business Account Bank Statements
  • tax returns
  • cash flow projections
  • debtor and creditor reports

Mistake #2: Not getting the right loan for your needs

A flourishing business requires enough capital to meet expenses, invest and expand, but it’s essential to know why you need the funds and what loan best suits that need.

Maybe you need new equipment? In this case, ask your specialist SME Broker about an equipment loan, where the asset is used as security while you make your repayments. This can potentially help make the loan easier to secure.

Do you need to cover short-term cash flow shortages? There are now many funders that will provide short term business loans, invoice or cashflow lending for up to 12 months with a pre-approved limit.

Mistake #3: Not having a solid business plan

Lenders want to understand your business’s operations and how it will generate money – in other words, your current and future cash flow will cover the loan’s repayments.

A strong, well-considered business plan demonstrates your goals and how you plan to reach them and shows you’ve thought through all the details.

When you can clearly explain your business model, products, services and target market, lenders or your broker will be in a better position to tailor a financial product to your needs.

Mistake #4: Not being aware of the interest rate, fees and hidden expenses

It’s critical to calculate and understand the total cost of a loan before committing to it. Apart from interest expenses, there are multiple fees, including:

  • application fees
  • administration fees
  • contract or appraisal costs

Regardless of the loan’s size, these will be incurred, so you might find it worthwhile to discuss increasing your borrowing amount with your broker to cover those costs.

Mistake #5: Not checking multiple lenders for the best deal

Having the funds to run and grow your business is essential, but you need to take the time and shop around for a loan that won’t create extra pressure in the long run.

A specialist SME broker can help you find the right loan and secure the finance that’s most suitable for your business. It will save you a significant amount of time and ensure that you avoid making these six common mistakes.

Mistake #6: Not knowing your credit score

Is your credit record good?

When assessing your application, some lenders will streamline approvals for loans up to $1 million for solid credit scores.

Your Credit Score can have a significant impact on the interest rate you’re offered.

Ask for a copy of your credit file from a reputable credit reporting body or a specialist SME Broker and go through it carefully to make sure all the information is accurate. If it’s not, take steps to correct it before starting the loan application process.

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