Now that there are many types of financing available to small- and medium-sized enterprises (SMEs) and startups, it’s an exciting time for entrepreneurs to shop around for loan programs. Such an endeavor can kickstart a pivotal period of growth for a small business that’s based in the Philippines.
But it’s also important to remember that there are plenty of pitfalls an entrepreneur can fall into during this process. If you don’t think things through, you may end up in a debt situation that will either stagnate your revenues or even put your business in the red instead of helping it generate a profit.
Any small business owner who plans to borrow money for their business, however small the amount, should know of the common mistakes associated with taking out loans. Having the right knowledge will make it easier to apply for a loan with favorable terms, as well as to stay on top of amortization schedules. To that end, here are the typical mistakes you should steer clear of when taking out a loan to finance your small business:
1) Borrowing Money Without a Clear Purpose
First, what exactly will you use the business loan for? If you’re still not clear on the purpose of the additional funds you’re hoping to access, then it’s best to mull it over before applying for a loan. Lacking a defined plan for spending the money will significantly increase your risk of misallocating the fund or spending it in an unproductive manner. As a consequence, you’re more likely to have a difficult time repaying the loan, and it may hamper the health and growth prospects of your business.
If you have the opportunity to file for a loan, take time to assess your business’s specific needs. Based on what you’ve gathered, create a detailed plan for the use of your loan funds. Let’s say you’re an active Maya Business solutions user and you’ve just qualified for a Maya Flexi Loan. This will give you access to a credit limit of up to PHP 2 million that you can divide into separate loans.
To maximize this opportunity, determine the aspects of your business that can benefit from additional funding, whether they pertain to your expansion to a new location or your investment in more cutting-edge equipment and machinery. Having a plan ensures the efficient utilization of the borrowed funds. It will also demonstrate to your lender that you’re a responsible borrower who won’t be remiss on their repayments. These extra steps will increase your company’s likelihood of getting approval from business banking loan providers.
2) Ignoring Creditworthiness
Remember that a poor credit score reflects a higher level of risk for lenders, resulting in higher interest rates and less favorable repayment terms. As such, overlooking your business’s creditworthiness before applying for a loan can lead to unfavorable loan terms or even loan rejection on your part.
Before you start shopping around for loans for businesses, it’s essential for you to regularly review and improve your business’s credit score. This will increase your chances of being qualified for loan programs that are targeted or designed for SMEs or startups like the one you own.
Start by checking your credit score and addressing any inaccuracies or negative marks. Next, develop a strategy to improve your creditworthiness by paying your bills on time, reducing outstanding debts, and maintaining a good financial track record. These are effective strategies for opening up better loan opportunities and securing loans at more favorable rates.
Taking out more loans than your business can reasonably afford to repay is a common pitfall that you should avoid. Borrowing beyond your means can lead to financial strain and make it more challenging to meet your loan obligations. For sure, this will hamper your business’s overall financial stability and cause you unnecessary stress in the long run.
To avoid overborrowing, carefully evaluate the amount you need and consider the impact of loan payments on your business’s cash flow. A realistic assessment will help you secure a loan that matches your business’s financial capacity and growth plans.
4) Inadequate Financial Planning
Insufficient financial planning can lead to inefficient use of borrowed funds and difficulty repaying the loan. Businesses that do not have clear financial plans in place may struggle to allocate resources effectively and falter when it comes to their loan amortization.
Steer clear of this predicament by creating a comprehensive financial plan—one that outlines how the loan will be utilized and repaid. Ensure that the plan aligns with your business’s goals, and regularly monitor your financial performance so that you’re on track to repay your loan in a timely manner. Adequate financial planning will not only safeguard your business from bleeding out due to your debt; it will also maximize the benefits of the loan and help you generate a profit out of the funds you’ve borrowed.
5) Rushing the Application Process
It’s also a common mistake to rush through the application process without researching different loan options or thoroughly reviewing the terms and conditions of the loan in question. Doing so can lead to unfavorable loan agreements and added difficulty meeting your business’s financial obligations.
For instance, failing to read and understand all the loan terms—including interest rates, repayment schedules, and fees—can make it a challenge for you to meet your responsibilities to your lenders. Plus, it can cause you to miss out on better loan products and terms from other grantors of business loan Philippines-based entrepreneurs trust.
Avoid this mistake by giving yourself time to research and compare your options. Check out different banks and financial services providers as well as the business loan products that they offer. Don’t put your eggs in one basket, and explore alternative financing options in case your initial choice fails to work out. This way, you won’t feel pressured or rushed to agree to terms and conditions that you’re not comfortable with.
Seek clarification on any unclear terms or conditions, and ensure that you fully comprehend the financial commitment you’re entering into. Your diligence and thoroughness will help you avert costly mistakes when applying for a business loan.
6) Failing to Build a Strong Relationship with Your Lenders
Your relationship with your creditors goes beyond a one-time deal. Nurturing a positive and open relationship with banks and financial services providers can open up future financing opportunities for your business. This is because lenders prefer working with businesses they trust and know to have good track records. Fail to communicate and build rapport with them, and you may limit your own access to better loans and more favorable terms in the future.
Maya Business, for example, offers hassle-free loans with low fees to entrepreneurs based in the Philippines. However, to access these loan products, a business must nurture a relationship with Maya by using the solutions provider’s products and services. In this instance, your strong relationship with your lender will end up being an invaluable asset to your business’s long-term financial success.
A review of the mistakes listed above should help you avoid cumbersome issues when taking out a business loan. Set a good precedent for your business’s growth and financial well-being, and be extra discerning about the business loans and other financing options currently available to you.