Common Pitfalls of Small Business Loans

Mon, Jun 11, 2012


For most new businesses (and even those that have been operating successfully for a while), taking out small business loans is just part of the professional package. Without funding you cannot launch your operation or keep it afloat, and since most people that start their own entrepreneurial ventures are far from independently wealthy, loans are just part and parcel of doing business. Unfortunately, any funding you receive from third parties has to be paid back. And that means you must be careful about how you allocate your money in order to ensure that you always have enough to send in your monthly loan payment (otherwise you could face fees, lose additional credit lines, and take a hit to your credit score as a result). So here are just a few of the common pitfalls that many small business owners face in regards to their loan situation and how you can avoid them.

The first mistake that many people make is overextending. Just because you get approval for a larger loan amount than you anticipated doesn’t necessarily mean you should take it. Biting off more than you can chew financially could quickly leave a sour taste in your mouth if your business doesn’t perform as well as it needs to in order for you to make your loan payments. So take the time to figure out what you can reasonably afford to pay each month based on your business budget. Don’t forget that you’ll also need to shell out for salaries, a lease, utilities, and all manner of other expenses in the course of doing business; your loan payment is just one amongst many.

Of course, this leads to another problem, which is poor planning. Most small business owners have a forecast for earnings that allows them to create a budget. If you’re smart you’ll plan for losses during the first year as you establish your presence and work to build your brand, assuming that anything you make will go directly back to the business. This will ensure that you have the funding you need to ride out this difficult growth phase so that you can give your business the time it needs to get off the ground. A failure to plan in this direction could result in a failed business, not to mention hefty loan payments that you have no hope of paying off in any kind of timely manner.

So beyond planning, you’ll need to focus on proper management of the funds you do have. Whether your loan is based on your personal credit or you happen to meet VA loan requirements, you need to take steps to maximize the impact of every dollar you spend. This means using proven operations and marketing strategies, at least in the beginning (rather than taking risks), returning money to your business (you have to spend money to make money, after all), making every loan payment on time, and avoiding any unnecessary expenditures. With careful planning, tempered borrowing, and smart money management you can avoid the most common pitfalls that befall small businesses when they take out loans, ultimately ensuring the longevity of your enterprise.

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