Banks and investors are in the lending business because they want to profit. They want their money to grow, and lending it to a mature company or one with growth potential will ensure the positive returns they seek.
A loan allows you to facilitate and leverage your company’s growth.
Obtaining a loan for your company is a significant step forward. Growth and sustainability will benefit your company, but there is risk involved. To avoid defaulting on your loan, your company must implement risk management systems. The owner of the company must be accountable and manage the company responsibly.
Advantages of taking a business loan
1. Having funds gives you peace of mind as a business owner because it allows you to focus on your core activities.
2. You increase the capacity of your business by purchasing machinery or hiring qualified employees.
3. You can ensure a consistent supply of goods in your business and pay your suppliers on time, which improves your reputation.
4. With additional funds, you will be able to begin investing in marketing and sales activities, which will positively impactsiness and lead to further growth.
External funding adds risk to your business and, if not managed properly, can have disastrous consequences.
The negative consequences will affect not only your business but also your personal life. As a result, it is critical to have the proper systems and processes in place to ensure that you can repay money plus interest.
The following are some guidelines to implement in your business to reduce the risk of default:
1. Make certain that you ask for the appropriate amount of money and that you do not overextend yourself. Financiers will do this upfront before issuing funds, but you must ensure that your business plans are carried out in order to receive the required upside you promised them when you requested the funds.
2. Funding should be obtained from reputable organizations. There are many unethical lenders on the market. Avoid loan sharks and shady financial institutions. Before signing any financing contract, you should conduct thorough research and due diligence.
3. Monitor your cash-flow budget on a monthly basis to identify and address any emerging issues.
4. Have regular open and honest conversations with your banker. They are more likely to assist you or be accommodating when you face periods where you are unable to cover any repayments.
5. Build the right finance team and sharpen your financial management skills. Knowing how to manage money is critical in business; if necessary, hire an accountant or a bookkeeper to assist with the technical side of finance.
The consequences of loan default are severe, so it is critical to have the necessary skills, systems, and processes in place to manage the risk.
Factors to Consider Before Taking a Business Loan
If your company is short on cash, applying for a loan may appear to be the best next step. After all, a cash infusion can keep operations running, support expansion plans, and ultimately help to increase revenue.
However, before borrowing money, it is critical to understand that you will be held responsible for repaying the loan regardless of what happens.
In most cases, you will be required to sign personally. If the worstcase scenario occurs and you close down your business, you will be liable for the balance.
1. Know your credit score: If you apply for a loan with a traditional lender, one of the main factors that will be considered is your credit score. So, before you contact any bank, make sure you know your numbers. Request a copy of your personal credit report (get one for free at AnnualCreditReport.com). Examine for mistakes, such as a payment that was made on time but was reported as late. If you discover an error, contact the credit bureau and the company involved to resolve the matter.
2. Recognize your options: Traditional lenders (banks and credit unions) and nontraditional lenders exist. OnDeck, a financial platform that provides loans to small businesses, is one of the latter options. While the interest rate you’ll get through OnDeck is likely to be significantly higher than the average rate today, the approval process will be much faster than at a bank. Furthermore, you’ll begin repaying the loan in small increments every day, lowering the risk of missing a larger monthly payment that comes with a traditional loan. A merchant cash advance, which is based on future credit card sales, is another option. While higher interest rates and fees are to be expected, there are several advantages to consider. It’s easier to get approved for a merchant cash advance, even if you have a poor credit rating. Once approved, you’ll receive funds quickly, and the repayment plan is based on your revenue.
3. Specify what you require: Before approaching any lenders, consult with an adviser or an accountant to determine how much cash your company requires to operate or expand. Prepare to provide documentation to support your request as well as to answer lenders’ questions about your finances, business model, and future plans. Also, be prepared to discuss how the loan will be used. For example, you could demonstrate how the funds will be used to purchase materials, establish a new location, or pay additional employees.
4. Recognize the process: Even if you don’t get the first loan you apply for, the experience may teach you something. Assume you were denied because of your poor credit. You could take time to improve your credit score and then seek a loan at a later date.
How To Avoid Being Ripped Off When Raising Business Capital
If you’re trying to raise money to grow your business or fund a new business, make sure you don’t get ripped off. Use these tips to avoid business loan scams.
1) if you don’t meet the minimum lender’s requirement (willingness and ability to repay),, you won’t get a business loan, no matter what someone else is trying to convince you about.
2) Be wary of any upfront fees: Be wary if you are asked to pay money up front (or any money at all) before being approved. This should raise a big red flag. Most genuine business loan brokers or similar individuals are compensated only when your company receives funds. Even the big players, such as investment banks, are only paid after the fact. However, some brokers or lenders will request a small fee. This is primarily intended to induce some people to selfselect. If they cannot or will not pay, they are not worth the time of the broker or lender. In these cases, paying the fee may be acceptable if accompanied by a guarantee.
The guarantee should either require that those funds be applied to any fees that may arise after a loan is approved and funded, or that they be returned if the lender or broker is unable to fund your request. However, you should only pay that upfront fee if you are certain that the broker or lender is genuine.
3) Do your research: Sounds simple enough, but you’d be surprised how many people (including seasoned business owners) fall for a sales pitch and never investigate the company or claims made. They actually count on you not doing your homework and have designed their offers to be so appealing that the potential victim is taken in.
Before you commit any time or money to your capital raising efforts, you must understand who you are dealing with, as getting that loan or being ripped off could mean the difference between the success and failure of your entire business and personal life.
Always begin with your social network, whether online or offline. Talk to people who have used the product or company you want to work with, and only talk to people you know and trust. Then, use other research methods, such as Better Business Bureau, Chamber of Commerce, and Google Search, to try to remove some of the human element from the data.
4) Read all of it multiple times: Even legitimate businesses conceal information they don’t want you to know in the fine print. However, the inverse is also true. If the company has no fine print, this could also be a red flag. Simply read and comprehend before signing. If you don’t understand, find someone who will explain it to you in plain English.
5) Expand your knowledge: Get some business financing knowledge if you don’t already have it. Learn about the various types of financing and their specific applications. When someone tries to pull the wool over your eyes, you’ll recognize it right away and be able to debate them on the spot. Understand how and why lenders underwrite business loans. Understand the different types of loans (such as working capital loans, equipment loans, inventory loans, and so on), what they are used for, and how they are funded. Also, understand which loans are tailored to your specific requirements. Not every loan is appropriate for every business situation.
6) Use your intuition: If you have any doubts , any doubts it could be your subconscious, higher power, or intuition telling you something that your conscious mind or eyes are missing.