With very few exceptions, every business borrows money at some point in its existence. Even if you were fortunate enough to start your business with a lot of cash in the bank, there will come a point in the future where you need access to a line of credit, and it will probably be for good reasons. There are times when you have to borrow money in order for your business to expand. You may want to cover a potential risk, or finance the purchase of new offices or new amenities. Borrowing money isn’t a sign that your business is struggling - it can often be a sign that you’re moving on to the next stage.
As with any occasion when you’re borrowing money, asking for finance can be a stressful experience. Company directors don’t worry any less when they’re borrowing money to finance their company than they do when they’re borrowing money to finance themselves - and just like when you’re taking our personal loans and personal finance, there are potential pitfalls you’ll want to avoid.
Unfortunately, borrowing money isn't always easy, even when your accounts clearly show that you're in a strong position. Banks still aren't lending as readily as they were before the global crash in 2008 even to large-scale business, and if you're a small business, then things can be even harder. That means if you are borrowing money for your company, you want to get it right first time - and that means avoiding the common mistakes we’re about to detail for you below.
Borrowing Too Little
This is probably the most common mistake of all. Because people don't like to borrow money in the first place, when the time comes to borrow money, they focus on the absolute minimum amount they're going to need, and then they borrow that. They think that they're being prudent, but actually, they're setting themselves up for a fall. The reason for this is that unexpected expenses have a nasty habit of turning up when you least expect them to. There are many types of unexpected expense that you can and should attempt to plan for, but the hard truth is that the reason these expenses are called 'unexpected' is that we don't expect them to happen. That makes them impossible to predict. We can almost guarantee that you'll be faced with a bill that you weren't expecting, and if your budget doesn't cover them, you'll be in difficulty.
Borrowing To Cover A Gamble
There's no such thing as a guaranteed success in life. Even the best-made plans can fall through, and any business can fail for any reason. With all that said, there are still some financial decisions that come with bigger risks than others, and if the risks are too high, you should only pay for them with money you can stand to lose. Money you've borrowed does not qualify as money you can stand to lose. Think about the decisions you make when you're playing paypal casino. So long as you have money to spend, you can keep placing bets on online slots until you get your money back in the form of a win. That's how you indulge in gambling safely. If you're playing online slots with borrowed money, chances are you have a problem with gambling. Borrowing money to take a business gamble would be more irresponsible than playing online slots with money you've borrowed from a friend, and potentially much more dangerous.
Borrowing Over Too Short A Term
This mistake belongs to the same school of thought as not borrowing enough money to begin with. You don't like to be in debt, and if you have to be in debt, you don't want that debt to last for any longer than necessary. With that noble principle in mind, you may be inclined to agree to a short repayment term to get the loan back to the lender as quickly as possible. In doing so, you're putting undue financial pressure on yourself. As long as a loan is affordable and you can comfortably maintain the repayments without damaging your company's financial interests elsewhere, the repayments are fine. Give yourself enough breathing space to continue your business operations normally, and take a longer-term. If everything goes well, you can always choose to repay the loan early with a lump sum at a later point.
Taking The First Option
Some banks specialize in banking, and others specialize in lending. The financial institution you hold your business accounts with may not necessarily be the best financial institution to offer you a line of finance. Even if they do, they may not offer you money on the best terms you could possibly receive. While it's a good thing to have a healthy relationship with your bank, you're under no obligation to be loyal to them. Just as they have other customers, you can have other customers too. It often pays to look around the market and find a specialist lending company to handle your business loan - you might be surprised to find out how big a difference it makes when it comes to interest loans and repayments. Also, in all forms of finance, it's better for your protection to have your current account and your lending in two different places. If it's all in the same place and something goes wrong, your bank would have the legal right to impound your money in order to ensure they get their loan repayments. If the loan is held elsewhere, you'll have breathing space to negotiate or delay your loan payments without risking your income being seized. It's always prudent to consider the worst-case scenario.
Like we said at the start of this article, every company you can think of has borrowed money at some point in its existence. Some of the biggest businesses in the world are saddled with millions of dollars’ worth of debt, but you’d never know it because they’re maintaining the payments comfortably and so they’re free to spend elsewhere as they please. Don’t look upon it as a sign of weakness and failure - head out into the loan market with confidence, avoid the common and obvious mistakes, and only accept a lending deal when it’s right for you.