Taking out a loan is incredibly common for small business owners. After all, few individuals have enough cash on-hand to meet every challenge or opportunity when it comes to growing their company, and taking out a loan is a good way to establish your relationship with a lender. There are some common mistakes, though, that could cause a loan to become more of a burden than anything else. If you want to get the benefits of a small business loan without the drawbacks, you’ll need to pay attention to the advice below.
Over-Borrowing
The best way to stay out of problems with a loan is to make sure that you don’t borrow too much. It’s incredibly common for newer businesses to over-borrow, taking out the amount for which they have been approved rather than the amount they need. While it can be helpful to have something of a safety net, the best way to avoid problems with the loan is to only borrow as much as you actually need. This keeps you from paying as much interest and from getting further into debt than your cashflow can easily accomodate. Know what you need to borrow beforehand, and stick to that amount.
Not Sticking to a Budget
The thing to know to stay out of trouble is to set up a budget. Many business owners assume that they’ll be successful enough to pay back the loan at some point, so they stop worrying about payments. Instead, a savvy business owner will go ahead and pay off the loan quickly by making it part of the operating budget. Remember, the faster the loan is paid off, the less it will cost. Set up and stick to your budget, and opt for an aggressive repayment schedule to get you out of debt as soon as possible. Being prompt on your payments will also let your lender know they can trust you, which will help you potentially get more capital in the future.
Losing Contact
Another thing that tends to help out small businesses is staying in communication with the lender. If you’re not able to make a payment or you can’t get it in on time, contact the lender immediately. Many small business owners have the mistaken impression that this will adversely affect them with their lender, but the opposite is true. You can often avoid late fees or going to collections just by being honest. While this won’t work in every situation, ensuring that you maintain contact is a good way to earn a lender’s trust. Remember that a good lender will want to know what’s going on, even if the news is about a late payment. Honesty and open communication will help keep your relationship working.
Defaulting on a Loan
Finally, make sure that you consider all of the consequences of defaulting on a loan. If you are unable to pay back a loan, the lender will begin to report missed payments to credit bureaus, which will lower your credit score. In a worst-case scenario, they may make a legal claim with a collections agency, or even sue for the remaining debt or to liquidate collateral you put up for the loan. If this happens, reach out to law firm services to help you negotiate and understand your options. Not paying back your loan can also result in higher late payment fees. Also, defaulting will make any future loans you need have higher rates. To avoid this, it is vitally important that you follow the tips above to not borrow more than you need, set up and follow a strict budget, and stay in contact with your lender.
The best way to deal with loan problems is to be aware of what you’re borrowing, and when it needs to be paid back. If you can’t pay it back, get in contact with the lender and fight to stay out of collections. If you can work towards paying off the loan, you’ll be able to use that money to grow your business. By knowing how to avoid the most common small business loan problems, you will be able to pay back your loans on time and avoid untimely consequences.
Does Your Small Business Need A Commercial Loan?
If you’re in California, Pacific Community Ventures offers fair and affordable loans from $10,000 — $200,000. We don’t require a minimum credit score, and specialize in working with small business owners who’ve had a hard time accessing capital, like female entrepreneurs, immigrant entrepreneurs, entrepreneurs of color, and borrowers that may have been turned down for SBA or traditional bank loans.
This post is from Brooke Chaplan, a freelance writer and blogger. She lives and works out of her home in Los Lunas, New Mexico. She loves the outdoors and spends most of her time hiking, biking, and gardening. For more information, contact Brooke via Facebook at facebook.com/brooke.chaplan or Twitter @BrookeChaplan