May 22, 2024

Business Bib

Business & Finance Blog

Business Loan: Costly Mistakes to Avoid

3 min read

Statistics show that at least half of small ventures never survive past the five-year mark.

Reasons can be diverse—incurring too much debt, underestimating the cost of starting a venture and keeping it afloat, or failing to secure a loan since owners didn’t invest in the help of a business loan consultant or their credit rating is too poor to qualify, among other things.

Aside from the abovementioned reasons, below are some of the common mistakes businesses need to clear steer of if they want to make it past the five-year mark:

Neglecting personal credit.

In the eyes of most creditors, an unfavorable personal credit rating can be a crystal clear indication that the business owner is not very adept at handling personal finances.

Unfortunately, it would be safe to assume it can also lead them into believing they are no better when it comes to handling business finances.

This belief can prove disadvantages especially when the need to secure a business loan arises.

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While the services of a trusted business loan consultant can always come in handy, ensuring your personal credit score is favorable is still highly recommended.

Thankfully, achieving a favorable credit score is not exactly rocket science.

Start by ensuring you pay your obligations—credit cards, mortgage payments, car loans, etc.—on time.

Keep in mind that your payment history makes up a significant percent (35%) of your overall credit score.

The other 30 percent is comprised of credit utilization.

As a general rule of thumb, it would be ideal to keep the credit utilization to below 30 percent.

Case in point: if you are given $10,000 available credit, it would be advisable to keep your debt at $3,000 or below.

However, be mindful that there will be instances where your unfavorable credit score can be attributed to erroneous entries on the report.

That being said, make it a point to always double check your credit report so you can dispute and resolve any errors.

Combining personal and business finances.

Akin to oil and water, business and personal finances do not mix.

If truth be told, combining them would be one of the biggest financial mistakes any business owner can commit.

There are numerous reasons not to mix business and financial finances.

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For starters:

  • It will make tracking business profits and losses very difficult. Likewise, it can also make budgeting and tracking expenses a total nightmare.
  • In most cases, creditors will ask for separate bank and income statements so they can accurately assess the financial standing of a business. In addition, combining business and personal finances might also give prospective lenders the impression that they don’t really take their business that seriously.
  • Mixing business and personal finances will also make it very difficult to differentiate personal expenses from the legitimate business expenditures. Calculating the correct business deductions for tax purposes will also become especially challenging sans separation of business and personal finances.

Fortunately, business owners can easily spare themselves from any inconvenience and trouble by keeping separate accounts for their business transactions and personal expenditures.

In addition, it would be best not to used business credit cards for personal transactions and vice versa.

Not having a line of credit.

As many business owners already know, preparing for any business emergencies should be considered a must.

The roof can leak, plumbing can get busted, and equipment can break when you least expect it.

Aside from the inconvenience, lack of preparation for emergencies of those nature can significantly affect employee productivity.

That being said, the importance of having access to extra money cannot be overemphasized.

To play safe, it would be a sound idea to take out a revolving line of credit in advance.

In essence, a business line of credit will give you access to cash you can use as soon as the need arises.

In addition, having a business line of credit can also help you effectively manage the current cash flow of your business.