Thinking about getting small business loans or some other type of business credit? Make sure you don’t make the same expensive mistakes that have brought others to the brink of financial disaster, or over the edge into bankruptcy.
These first three common mistakes can be extremely expensive. But they often follow as a result of the four mistakes that finish this list.
1. Focusing On Teaser Interest Rates Instead Of Large Fees In Small Print
There are hundreds of organizations trying to sell you money for your business. You’d think that was good news, right?
The bad news is that digital loan sharks swim among more honorable companies, and it can be hard to tell the difference.
Here’s one way the sharks try to fool you. They attract you with low “teaser” interest rates you probably can’t qualify for. They’re just available to businesses with super-high credit ratings.
Then they don’t tell you the true APR (Annual Percentage Rate) that reflects all of their fees, including late fees that end up increasing loan costs fast. And they know you won’t read the fine print.
They make their high profits from the fees detailed in the fine print.
How do you avoid this mistake? Here’s a quick fix: start by just talking to online lenders that have signed the Small Business Borrowers’ Bill Of Rights.
2. Getting A Short Term Loan for Long Term Needs
It’s always true that a 90-day loan will “cost less” than a 5-year loan in terms of total interest. But how long do you need extra money to help your business grow? Lots of businesses need that extra cash all the time as they grow.
If you need that funding long term, a 5-year loan will cost much much less in interest than a 90-day loan that you have to renew 20 times because you still need the cash.
Not only is the total interest lower on long term loans, the repayment schedule – what you have to pay back every month – is much much lower on a long term loan.
Here’s another way short-term loans can be an expensive mistake. If your cash flow is unpredictable, it’s likely you will miss at least one loan payment, because short term loans have daily or weekly repayment schedules. Boom: big late fees.
For more about this problem, read Short Term Vs. Long Term Business Loans: Think About Renting Money
3. Using A Broker For Small Business Loans
It takes work to apply for a bank loan. It’s tempting to hire a commercial loan broker so you don’t have to do the work.
My banker friends say they only see legitimate commercial loan brokers involved in large, complicated real estate deals. If that’s not what you’re trying to finance, you may be hiring someone who:
- Will steer you towards lenders that pay the highest commissions to them, not what’s best for your business
- May not disclose all of the fine print
- May use high pressure sales tactics.
There are better, free alternatives! See below for more.
4. Waiting Until The Last Minute
Sometimes funding needs are sudden. A big customer suddenly goes out of business. A new business opportunity falls in your lap. Sharp increases in online sales demand more inventory ASAP.
But the more time you have to look for money, the better your options are going to be. For sure, there are online lenders who can provide extremely rapid responses. But the timeline for the gold standard of small business loans – SBA loans – is measured in weeks rather than hours.
If you can take a bit of time every week to think about future funding needs, and prepare what you need to get that funding – things like a cash flow forecast – you will have more options that are far cheaper than two-hour business credit.
5. Not Getting Free Help First
Let’s face it. Getting a loan is probably one of your least favorite things to do, right next to filing taxes. But in the US there are people who actually enjoy it, and are paid to help you for free, and are measured by how successful you are.
The Small Business Development Centers are a confidential free resource. They are your go-to organization for planning to get small business loans.
If for some reason your local SBDC isn’t giving you the help you need, try SCORE or a Women’s Business Center. And if you’re in a disadvantaged or underserved population look for your local CDFI, which combines money with business advice.
You don’t need to do this alone, and you don’t need to pay for help!
6. Not Understanding Why You Need A Loan
Small business loans come in many shapes and sizes. Like in many other industries, there are specialists with products that fit different money needs.
For example, if you need money because of inventory, or the need for specialized equipment, or because big customers pay you slowly, there are different “colors of money” for those different needs.
A mismatch between your needs and your search for money can lead to lost time, frustrating failures, and more expensive money.
For more on how to avoid this mistake, read What Type Of Business Funding? Start With Why
7. Not Understanding How Much Money You Really Need
Without free help it’s tempting to wing it and get money “just in case.” That can be expensive!
Either on your own or with help, make sure you have a really good cash flow forecast. That’s the only way you can make sure you have Goldilocks funding that is “just right” for your needs.