Borrowing money to start or grow your small business is big decision to make. There are many things you should consider before deciding to borrow. You should ask yourself, can I afford to borrow? Am I confident that I can service the debt and payback lenders on time? In my professional opinion, being able to service the debt and payback lenders without defaulting should be a business borrower’s primary focus when considering using debt financing to start or grow a small business. The second focus should be how the financing will be used to start or grow the business (i.e. what the revenue generating activities will the money be spent on to grow the business). Not having a focused plan when borrowing money for a small business is one of the biggest mistakes that you can make and can cause you to do it the wrong way. Here I discuss the top 3 ways business owners borrow money the wrong way and find themselves defaulting on a business loan or going out of business completely.
1. A complete disregard for your personal credit – Your personal credit is very delicate and the smallest delinquencies or derogatory accounts can hurt your credit score. That’s why it’s important to protect and preserve your personal credit history when you are borrowing money for your small business. It’s no secret that most lenders nowadays are requiring business owners to provide a personal guarantee for any business funds lent to them (especially if the business is a startup), so it’s important that you don’t neglect your personal credit if you plan on applying for small business financing. Lenders will check your personal credit history to determine if you are creditworthy. A bad personal credit history could land you with less than favorable interest rates and terms or even worse – denial of new credit! Lastly, it’s wise to avoid using things like personal credit cards for your business expenses. Your personal credit usage will be reported to the credit bureaus and if you find yourself maxing out the credit cards on business expenses, you may see a drop in your personal score, which will further affect your ability to get new credit for the business as it grows.
2. Not understanding the impact small business financing will have on your cash flow – Borrowing money can be ideal if you need the funds to grow the business, but what if that same money could contribute to your business failing? Before borrowing you need to know what you can afford to borrow. You need to understand how borrowing will affect your cash flow. You don’t want a get a loan or line of credit with unfavorable interest rates, fees, and terms that will cause you to have high monthly payments. High fixed or variable monthly payments could eat through your liquid assets causing your business to fail. To avoid this, plan ahead before borrowing. Know what you are going to use the borrowed funds for and how much you can afford to pay back to the lender on a monthly basis while you are growing your business.
3. Choosing a small business financing option that is not appropriate for you – This can negatively impact your business. For example, if you own a startup business with little to no revenues or inconsistent revenues, chances are a loan based on your daily credit card sales (e.g. a merchant cash advance) is not going to be right for you. Your business may not be making enough money on a daily basis to cover the cost of a merchant cash advances. (Merchant cash advances often have to be paid back to lenders by them debiting your business bank account daily or weekly). Therefore I you don’t have the liquid cash to cover the cost of that type of funding, you may default. Seeking something else such as a small business credit card or an unsecured business line of credit may be more suitable (with a monthly payment) instead of daily or weekly payment may work better. Choosing the most appropriate business financing requires knowing what options are the best options available to someone in your unique situation.
Borrowing the wrong way for your small business is avoidable if you have the proper knowledge. The best solution to gaining the properly knowledge is to work with an experienced small business financing expert that will help you determine what type of financing is the best option for you (based on your unique situation). Working with an expert can also help you avoid obtaining business debt financing that will negatively impact your cash flow and your personal credit history. You save yourself time and money and can avoid having a failing business by seeking an expert to guide you on how to borrow money the right way.
Brittni Abiolu is the Owner & Publisher of www.CapitaLinker.com. Through her website, she serves to educate entrepreneurs and small business owners on how to increase their chances of obtaining capital in the simplest way possible and how to find and connect with the most appropriate funding sources. You can connect with Brittni on Linkedin, Google+, Twitter, Facebook, and Pintrest.
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