Avoid These 5 Common Mistakes About Small Business Financing
One of the toughest parts about running a small business is dealing with the ups and downs of cash flow. Some months you thrive while others fall short. The constant flux creates stress and may cause you to make rash decisions. When you’re rushed into small business financing, you may make these five mistakes that may do more harm in the long run than good.
1. Not Looking for Hidden Fees
If a loan seems to be too good to be true, it may very well be. Lenders stay in business by charging you fees for every element in funding the loan. The most common of these are:
- Loan original fees
- Closing costs
- Contract preparation
These may be flat fees, like $1,500 for document prep, or they could be a percentage of the entire loan. Most loan origination fees start in the three to four percent range and can add up to big bucks throughout your loan. Know every penny you will be charged before signing on the dotted line.
2. Not Taking Into Account Annual Percentage Rates
Interest rates ebb and flow from month to month or year to year. Your lender may offer your small business financing with a deferred interest rate or introductory rate which is much lower. However, pay close attention to how this rate will change after the initial period. Many times they can shoot up 10 percent or more, again, adding on thousands of dollars of debt.
3. Not Considering Other Debts Like Credit Cards
When considering how much you need and how much you can afford to repay, you may not think about all the other debts. Credit card balances get missed when calculating the cash you have to meet loan repayment terms.
4. Not Getting the Proper Information From the Lender
You may apply for a small business loan and get turned down each time. Do you know why? Many owners get shot down and never ask for the reasons behind it. Ask the lender why you did not qualify, so you know what to fix for the future.
5. Not Accounting for Long-Term Consequences
When you take out a loan with a payment you can make now, are you thinking about what that payment will look like a year from now? Once the APR adjusts or other fees come due, your payment may increase hundreds or thousands of dollars. Don’t treat a long-term loan like a shorter one. Think about the future.
Small business financing can help your business in times of need. However, if you aren’t careful will how you approach the lending process, you could wind up back in a negative cash flow position in a matter of months.