Borrowing Money for your Small Business: What Loan is Best for You

Posted by Factor Funding Co. on April 19, 2013

In recent years, more and more banks have tightened their lending requirements, making it difficult for many entrepreneurs to get approved for lending. Due to the shortage of available business credit, some business owners may be willing to accept the first loan they qualify for without looking carefully at the terms and conditions. This can prove quite costly, both to their businesses and their personal finances. Here are a few of the common business-borrowing mistakes you'll want to avoid to help your business become more successful.

Putting Up Too Much Collateral

In an attempt to avoid a high number of loan defaults, some banks require that business owners secure their loans with an unusually high amount of collateral. However, using a large amount of assets to secure your financing can cause your business to fail if you suddenly have trouble repaying your loan. With the wrong lending arrangement, you may end up having to use your personal assets just to guarantee your business loan! Instead of jumping at the first loan offer you receive, shop around and find out what collateral options are available at several institutions. Then, carefully decide which of your assets you're willing to use to secure the financing.

Neglecting to Maintain Your Credit Rating

Another common business-borrowing mistake is forgetting to take care of your personal or business credit score. It's all too easy to forget to pay a bill or two when you're occupied with caring for the daily needs of your company. But when you miss a few bills in a row, your credit rating can take a serious hit, which could make it more difficult for you to get approved for another loan down the road. No matter how much work you have to do, set aside a few minutes each week to go over your current bills and pay them.

Failing to Consider the Impact of the Loan on Your Budget

Even if you get approved for a business loan with good terms that won't require too much collateral from you, you can still run into trouble if you overlook the importance of finding out how the loan will affect your bottom line. For example, you may need to borrow $100,000 for an upcoming project. However, if the monthly repayment amount will substantially increase your expenses, you may not be able to afford it, no matter how much you think it might help you. Before you sign on the dotted line, make sure that you've considered what it will take to repay the loan in high revenue periods and slow sales seasons.

Looking for business financing can be difficult, but it’s worth it if you find a good loan. By avoiding these common business-borrowing mistakes, you'll sidestep many lending errors that could sink your business.

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