Posted on: June 14, 2021 Posted by: James Cook Comments: 0
Business Loan Mistakes

Do you need business loans for your company or product? The answer is likely ‘yes. However, there are many pitfalls to avoid when taking out a business loan. For example, risky loans will have shorter repayment periods which means more interest paid to creditors. It’s also essential that they’re legal and registered.

The majority of small business owners find themselves in a complex financial situation at some point in time. They often see their business as their only source of income, and when they can’t make it work, they may take out a personal loan to keep things running.

This Can Be Dangerous For The Following Reasons:

  1. Because you’re not making the payments on your loans, the result is that you’ll continue to pay interest as well as taking on new debt which could be worse than the original issue.
  2. Your credit score is also affected, which may result in the inability to take out future loans or even get a job.
  3. You need to build up your business credit to get the funding you need to grow your business. If you take out a personal loan and default, then it’s much more challenging to get another one in the future.

But in case you set out to get a business loan, you may make some mistakes due to reasons like lack of information or awareness, devoid attention, inefficient lender, etc. Here are some of the main mistakes you should avoid if you’re looking to apply for a business loan:

Not Knowing What The Lender Wants

Each financial institution has different lending needs. Therefore, it’s essential to know your lender’s specific needs before applying for a business loan in Canada. For example, if you’re a business owner and plan to expand, you should consider applying with a venture capitalist. On the other hand, if you’re an entrepreneur who plans to launch a small business, your best bet would be applying for a Small Business loan.

Not Using Appropriate Collateral

Many types of business loans require some form of collateral. This means that the lender will keep something that has considerable value to force you to pay back your loan. For example, if your loan is for $500,000 for a real estate investment property and that property values at $600,000 – the lender will want all or part of the $600,000 as collateral to protect their investment.

While the use of collateral is a good idea, you should always make sure to use as much (20%) or as little (10%) of your own money as possible.

Ambiguity About Prevailing Interest Rate

It’s crucial to know your interest rate before you take out a business loan in Canada. Most financial institutions will want to know what percentage rate and length of the loan they will have access to before they even begin to consider loan approval. For example, if it’s 30% interest and for 5 years, that would mean that the annual interest payment would be $5,000 ($150,000 borrowed x 30% interest = $60,000). On the other hand, if it’s only 15% interest and for 2 years, that would mean that the annual interest payment would be $3,000. In this scenario, the low-interest rate saves you a total of $2,000 ($5,000 saved x 2 years) on your initial loan. As an entrepreneur/business owner, you should always try to negotiate a low rate even though it may not seem possible.

Neglecting Upfront Fees Details

Some financial institutions will charge upfront fees for services such as credit report review and underwriting. However, you should consider this not something you should consider paying for and always check with the creditor’s terms and conditions.

Poor Allocation of Funds

Just because you’re getting a business loan in Canada doesn’t mean that you need to spend every last penny on the business. Set aside at least 10% of the loan amount each month ($1,000), which can be used in case of unexpected expenses such as payroll tax or invoice payment. Also, make sure to save enough money each month so that when the business is profitable, you have enough liquid cash to pay off your business loan with no problem.

Lack of Awareness About Credit Score

Even though financial institutions must carry out a thorough investigation, they will use credit history as one of many factors when approving or disapproving a business loan. In addition, financial institutions also use credit reports to determine if you would repay them on time. However, don’t take this factor lightly since bad credit can prevent you from obtaining other types of loans.

Doubtful Profitability of Business

When it comes to an investor seeking to invest in your business, they want to know that their money is being utilized efficiently and wisely. Ensure they see a profit and increase in revenue when checking your most recent tax returns and financial statements. Please don’t take out a loan for a business venture unless you’re sure that it will be successful. If your company fails or doesn’t have strong financial backing, then you could end up with too much debt for what’s being repaid.

Underestimating The Importance of Business Plan

Financiers must understand how the loan is going to be used. If there is any uncertainty or confusion about it, there’s a good chance that your loan will not be approved. Therefore, you must explain in detail how you plan to use the loan money so that they can trust that you’re on the right track. In addition, some lenders need to see evidence that shows your plans for the future and future growth of the company. You may not be able to predict all factors that could affect your company’s income over the next couple of years. Still, by using your business plan to estimate prospects, you can get a clearer idea of what your company will look like. If things don’t pan out as expected, you have more time and options to repay the loan before it becomes too expensive.

Spending Little Time in Preparation

Although you’re required to have a well-thought-out plan and business pitch prepared, the approval process for a small business loan in Canada is not going to be easy. Applying for a business loan is never fast or easy so expect to spend some time researching and preparing your documents to make sure everything is ready. If you’re ever in doubt about any of the information you’re providing, then reach out to your bank for clarification and advice.

Most importantly, never neglect your financial well-being. It’s an unfortunate fact that small businesses frequently fail due to cash flow issues. Unfortunately, these are some of the most common mistakes in borrowing a loan from a financial institution.

So what should you do? First, make sure to do all your homework before securing any business loan. Including checking the latest interest rates, terms, and how much collateral these institutions require.

Loan Centre Canada is one of the best and most reliable lenders of business loans in Canada. They offer mortgage services, car title loans, personal loans as well as debt consolidation. The loans are offered at competitive industry rates and in a time-efficient manner. As a result, you can focus entirely on your business while taking care of your business loan formalities.

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