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If you’ve had a loan application approved, as a first-time borrower, how do you avoid trip ups you’re not even aware of? One step is to consider what mistakes other business owners made before you, and to learn from them. Here are the top four errors that you should be on the lookout for.
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Misunderstanding the cost of lending
The lender approves your application and a lengthy contract shows up on your desk. If you think you already know how much the loan is going to cost you, you might feel tempted to quickly glance through the cost section. Don’t. There are sometimes other fees that you should consider before putting your name on the dotted line.
Handling paperwork that’s full of confusing jargon? Here are some of the key terms translated into everyday lingo:
Origination fee: The fee charged for processing the application and preparing the offer for you. Lenders may charge it as a flat fee or as a percentage of the loan amount.
Service fee: The costs incurred from the administration or ‘servicing’ of the loan, which includes the management of the repayments and ongoing customer service. This could be billed monthly or as a one-time payment.
Early repayment fee: This is a fee that might be charged if you want to pay back the loan earlier than specified in the original repayment schedule. You really need to read the fine print on this one. While some lenders may not specifically charge an extra fee for early repayment, you might still have to pay a proportion of the interest that would have been charged over the entire life of the loan. This can disadvantage you if you want to pay back early.
Some lenders charge these fees, some don’t. Each case is different, which is all the more reason for you to be vigilant with the terms and conditions.
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Overestimating how much finance you need
It’s better to have too much than too little, right? Not exactly. Borrowers that go for too big of a loan suddenly have to deal with what we call “dead money”. This refers to unspent funds that are not being used for productive purposes and producing a return for your business, but are costing you in extra interest you’ll have to pay for.
Avoid this by collecting precise quotes for the expenses your plans will include. If specific numbers are hard to come by at this stage, having rough estimates from suppliers is still a good start. Adding up these figures can map out the ranges which you should aim towards for your loan amount.
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Poor application timing
Every business will find itself in an unexpected situation at one point or another, there’s no doubt about it. But emergency applications rarely work out in your interest. For one thing, you feel pressed to agree to potentially outlandish rates and bad conditions. What’s more, you lack the time to consider your options and make the best decision.
Setting up a source of emergency funding is the most efficient way to dodge this uncomfortable situation. Products like a business lines of credit could give you flexible access to capital when you need it.
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Lacking an actionable business plan
This final point relates to before and after you apply for a loan. To start, not having solid knowledge of your business finances and where they are headed reduces your chances of approval. If the lender does give you a thumbs up, you’ll be missing a roadmap on where to invest the funds. Spending could quickly spiral out of control.
Start with a clear vision of what it is you want to achieve with the funding. Is it to buy more inventory for an upcoming busy period? Are you launching a new product or service? Whichever scenario you’re handling, map out your objectives in detail and consider the steps you need to take to achieve them. Assign costs to these steps, based either on your experience or on market research. If you can have these details written down, even better.
Effectively managing your newly acquired funding is closely tied to good planning. This process might sound arduous and unnecessary, but a robust plan will significantly increase the value of your effort. Take the time you need to find the best solutions for your business and you’ll be well on your way to success. Good luck!
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