Taking out a short-term loan for your small business can be the best move you can make to get the business off the ground or recover financially, but it’s not always. Many people think taking out this type of loan is the solution to all their problems, and sometimes it can be, but only if you avoid making common mistakes.
One mistake can set you back financially and mean bad news for your business.
You don’t want to be the person making one or more of these mistakes and causing yourself more stress. The key to avoiding these mistakes is to know what they are.
Here are common mistakes that other small business owners have made when using this type of loan for their business.
1: Choosing the Wrong Loan Type
There are several types of loans that small business owners can use. Even when you narrow it down to wanting to take out a short-term loan, there are still a few different routes you can take. From unsecured personal loans to payday loans to short-term bank loans, there’s a lot to think about when it comes to doing right by your business.
But how do you know which loan type suits you and your business? There are over 44 financing options to choose from, so understanding what your needs are will help you make the best choice regarding your short-term loan.
For example, if you’re looking for financing to cover equipment costs or something that will cost you quite a bit, short-term loans generally aren’t the best move you can make.
2: Accepting a Loan Without Fully Understanding the Terms and Conditions
Worrying about financing for your small business can be incredibly stressful, so finding a lender offering you a short-term loan can ease that stress and be exciting. A common mistake many people make is letting that excitement take over and not thinking clearly.
Having access to a short-term loan that you get approved for right when you need the funds can cause people to take out the loan without really understanding all the terms and conditions. Some potential issues you might run into by not knowing or understanding all the terms and conditions are your interest rate, when monthly payments are due, the loan term, etc.
As exciting as getting a short-term loan can be, taking the time to make sure you fully know what you’re getting yourself and your business into first will set you up for success. When you aren’t 100% aware of the terms and conditions, you can end up in a worse spot than you started.
If you don’t know the interest rate or the APR (annual percentage rate), you might pay much more over time than you thought you would, potentially setting you back even further financially.
3: Taking Out a Loan that Won’t Increase Your Business Revenue
One of the biggest, yet most common, mistakes small business owners can make when using a short-term loan is to take it out when it won’t actually increase their revenue. It’s not a secret that small businesses can sometimes be short on funds, especially as they get started, but short-term loans aren’t the best solution to any financial issue you run into.
It’s tempting to take out a short-term loan to cover the cost of your own salary or anyone you employ, but that’s a slippery slope. While you might think that a short-term loan is a solution to all your problems, if the money you’re borrowing isn’t fueling the growth of your small business, it’s not beneficial for you.
While it might seem like a solution at first, the amount you’re borrowing can be far greater after your interest rate and APR than what you need to pay your salary or those you employ.
While you want to be able to pay your and any employee’s salaries, a short-term loan isn’t the solution in that instance.
Using a short-term loan to invest in business endeavors that will ultimately help you grow your revenue is vital for a short-term loan.
4: Not Making On-Time Payments
This next mistake might seem obvious, but you’d be surprised. As simple as it seems to ensure you’re making on-time payments for the short-term loan you took out for your business, missing a payment or two isn’t uncommon.
Missing a payment or two isn’t the most uncommon thing that can happen to small business owners, but it does happen. Whether you’ve missed one or five payments, this is a very common mistake people make when taking out a short-term loan for their small business.
With short-term loans, it’s easy to take the money and be excited that you’re able to pay business expenses that you weren’t able to before. While that’s the main point of the loan, if you cannot keep up with the monthly payments, you’ll be in trouble.
When you miss payments on your short-term loan, you’ll not only cause yourself stress but also end up paying a lot more money than the total loan you took from your lender. Any missed payments will often result in interest being added to the total of your loan.
One missed loan payment might not seem like much, but continuously not making on-time payments can result in a lot more money spent.
Final Thoughts
Finding the right financing can be the solution to making your small business successful. Whether you do research on your own or consult a financial advisor, it’s best to understand your options fully.
Short-term loans can be wonderful options for financing as long as you know what you’re getting into.
The idea behind short-term loans can be exciting for a small business owner, but there are several mistakes that other small business owners have made previously. There are plenty of websites on the internet offering financial advice, but for great advice, this personal loan blog won’t steer you wrong.
