4 Common Business Loan Mistakes to Watch Out For

Financing your small business can come with many risks and pitfalls, especially if you fail to consider your unique needs and circumstances. Here are 4 common business loan mistakes to watch out for, and how you can avoid them.

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1. Borrowing More Than You Need

It can be tempting to borrow more than your business requires - especially when an attractive deal is being dangled right in front of you. But doing so can hurt your business more than you think.

The culprit here is interest charges, which are applied on every dollar you borrow. As the more you borrow, the more interest you have to pay, borrowing more money then you need can strain your finances, and even wipe out your hard-earned profits.

To prevent such a situation, make sure you have a firm grip on the financial state of your business - even if it means hiring a professional accountant to give you the true picture.

Another way to make sure you don’t of overboard with your borrowing is to peg the amount you borrow against your accounts receivables. Invoice factoring offers a quick and fuss-free way to do just that.

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2. Not Borrowing When You Need It

It can also be easy to go the other way, holding off on getting the money your business needs until it’s too late. If this happens, you might be forced to give up an important trade show that could give your company the exposure it needs, or could miss out on bulk purchase opportunities that would provide substantial savings in the long run. Or maybe, cede a strategic location to your competitors.

Know that most business loans take around 3 weeks to process - more if yours is a special case. This delay in capital injection could spark off a cascade of negative events affecting your company.

To prevent this unfavourable scenario, be sure to be judicious in predicting your cashflow needs, and make the necessary financing arrangements ahead of time.

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3. Getting the Wrong Type of Loan

As a small business owner, about the worst thing you can do is to tap your personal credit facilities to fund your business needs. Instead, you should be getting familiar with the various types of SME financing available in Singapore:  

• Unsecured business loans are probably the most familiar, being commonly offered by many banks. You’ll have to provide at least 2 years of full accounts to qualify for one, in most cases.
• Besides banks, businesses may also seek grants and loans from Enterprise Singapore.
• Instead of borrowing money for equipment and fixed assets, consider using hire-purchase or leasing instead. This can provide you with the capabilities your business needs, without having to buy, depreciate and eventually dispose of capital-heavy equipment.
• Use invoice factoring to get an advance on the value of your unpaid invoices. Companies may unlock up to 90% of their unpaid invoices this way, avoiding the issues inherent with extending long credit terms.
• A company can also consider pledging existing property as collateral, in return for a low-interest loan.

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4. Having High Debt-to-Equity Ratio

This last point may not seem like a problem at first, but it could eventually prove to be a liability.

The debt-to-equity ratio is a measure of how much debt your business has accrued, versus how much money it has brought in. A promising business with attractive top lines becomes a lot less desirable as the debt-to-equity ratio climbs; this is because it calls into question the ability of the venture to stand on its own two feet, financially speaking.

This, in turn, could scare away potential investors, delaying your plans to grow the business or set back your schedule for exiting the market.

One way to keep your debt-to-equity within reasonable limits is to consider non-debt financing, such as invoice factoring. This way, you can get the cashflow your business requires, without adding too much debt to your balance sheet, and skewing the valuation of your company.