The first time I received the good news of my business loan approval I was ecstatic. I was cash-strapped, and I knew that the newly acquired funds would help me achieve my goals. When signing the loan agreement form, my mind was racing with the possibilities ahead of my venture. But I had made one mistake: there was no plan for exactly what to do with the finances. This is a common mistake among new entrepreneurs. To avoid such blunders, there are a few rules we must follow when financing our companies.
It is good to be wary of how much debt we are getting into to finance our enterprises. Nevertheless, undervaluing the overall cost of a business project can leave us in a severe cash crunch. While our firm may not go bankrupt, unexpected expenses might crop up and force us to convert assets into liquid cash. When borrowing, let us apply for enough cash to cover all project costs plus unpredictable contingencies. It helps to plan a cash flow for each project stage, including both pessimistic and optimistic cases. To manage the project and the costs, it might be beneficial for companies to use spreadsheet software to keep track of all costs. Perhaps the software from Prosymmetry could be helpful.
It feels good to have debts off our shoulders. However, we might cost our ventures, struggling to repay the bank too soon. If we are left short of liquid money, then we will have cash flow issues. Rather than straining to use extra money to repay a loan, we can spend it on profitable areas. Here’s a good rule of thumb to avoid repaying too quickly: compare potential savings on interest by paying the loan faster vs. the expected return on investment. If the projected ROI is higher than the potential savings on interest, there is no need to speed up the repayment pace.
Sometimes, we finance business expansion with cash flow. This creates undue pressure on a growing venture. In turn, we end up borrowing urgently at the point of desperation. Getting into debt at a point of weakness shows our lenders that we don’t plan our finances well. Urgent funds are hard to acquire and can be very costly. To avoid this trap, let us always make cash flow projections in advance to take care of monthly inflows and outflows. We also need to set aside a kitty for planned investments. With these in place, we can visit a bank to discuss our financial needs.
Our business projects only make sense to us. If we don’t know how to convince bankers on board, we may not go far. A strong pitch involves explaining the business plan, competitive advantage, and past performance. We have to practice the pitch, explaining how we shall utilize the funds in compelling terms. The important thing here is to make the lender see sense in our business management and ability to repay.
Some of us depend on one bank for business loans. But we don’t want a single lender to be holding all our cards if things go haywire. Just the way we keep growing our clientele base, we ought to diversify our lending options. We should talk to other financial institutions to build relationships. They might be offering better financing terms. When shopping around, we must not forget other terms besides the interest rate. The same applies when talking to Hard Money Lenders – don’t just focus on the amount of interest.
Of course, a business can always plan ahead for unexpected circumstances that may cause the company to lose its ground and face financial difficulties, such as the death or exit of a key employee vital to the company operations. Businesses often need to ensure that the loss of a top tier executive or an employee with specialized skills does not put the company in jeopardy. Taking this into consideration when forming business plans by understanding what is key person insurance and how it can act as a safety net for the company could help in overcoming unforeseen crises. However, not everything can be planned for, and a business may, at some point, see the need for additional funds which can be procured via business loans.
A successful loan application is the beginning of a growth-oriented future for a business. Intelligent deployment of loan money is critical to optimizing new business capital. We should know how to manage properly finance if we want to fuel our business needs to the next level. Let us avoid common mistakes, as we’ve pointed out, to avoid jeopardizing our ventures’ future.