Business loans are essential for many companies, but they can spell disaster when managed poorly. The Internet has made it more convenient, faster and easier to access financing for your business. You are able to immediately submit applications for business loan and eventually get enough cash in hand. Unfortunately, even if it is convenient, fast and easy to get business loans, you may not get the best results. It’s actually possible that your business will be ruined due to mismanagement,
1. Your personal credit score is too low:
Before applying for business loan, it is important that you have an ideal personal credit score. In fact, credit score is the single most important factor that you will be approved for a loan. If your score is below 650, your chances of approval will be significantly reduced. Before applying for business loan, you should check with TransUnion, Equifax and Experian to know your current credit score. You should check their reports for any mistake and you should notify these agencies when you encounter some errors. This should be performed as soon as possible, because it may take a long time before corrected values will enter your report. With low credit score, your loan can be cancelled completely and your business dream will be ruined before it even starts.
2. Your revenue is too low:
Before starting a business, it is important to know what you will get. You need to make sure that you can make money and it is important to define your marketing strategy. Revenue projections are essential if your business is funded by loans, due to the higher financial risks. You need to put your revenue projections in writing and your entire plan must be well thought out. Business loans could spell the demise of your company, if your revenue isn’t high enough. If your revenue is too low compared to the original projections, it will be difficult to repay loans. This will have severe financial and legal implications.
3. Your loan is too big:
Regardless of how good your plan is, ultimately it’s about the amount of money that you can make. Other than your credit score and revenue projections, you should also submit bank statements from the past 6 months, tax returns from the past two years and the latest balance sheet of your company. The lender will perform cash flow analysis and forecast your future revenue. You should be able to prepare most financial documents with various accounting software. Before applying for a loan, it is a good idea to perform a complete review your current financial condition. Any inconsistency may hide the fact that you are not really eligible for a loan. If your loan is too large compared to the financial capacity of your company, you won’t be able to use it effectively. You won’t become more productive with a loan that is too large and the amount of repayment will be higher.
4. You use the wrong collateral:
If you apply for business loan, lenders often require you to put up personal collaterals as guarantee. If your business fails, your valuable personal assets can be used to repay the loan. In general, it is inadvisable to use your primary home as collateral, because you will lose everything if your business fails. If you are completely broke, you may not even afford to rent a cheap apartment and you will become homeless.