Small businesses, like all commercial ventures, need a regular flow of funds to stay afloat and to fuel further growth. Commercial loans and small business financing are options based on each organization’s unique needs. They’re most appropriate for one-time, big ticket expenses, ideal when you’re planning to purchase capital assets and when you’re not facing an urgent funds crunch. Commercial loans or small business financing can be used to refinance existing loans.
It’s important to secure the right financing option, whatever the reasons for taking it on may be. This is a decision that can have a far-reaching, deep impact on the company’s ultimate destiny and its future viability. Commercial banks are usually the first and perhaps safest option but there is some reluctance on the part of the banking sector to finance start-ups. More mature ventures find it easier to get loans, and the devastating crash of 2008 has made institutional financing less approachable now.
What Is A Commercial Loan?
It is a debt-financing arrangement between a business venture and a financing institution. It is granted to business entities to assist with short-term funding requirements, based on the credit-worthiness of the borrower. The borrower/company has to provide relevant documentation to support the evidence of consistent cash flow.
It’s important to ensure that you don’t expose your small business to a serious crisis. Unlike larger companies that can absorb the shock, smaller ventures tend to collapse or take a long time to recover. Even small mistakes can lead to expensive repercussions.
6 Commercial Loans Mistakes Can Kick you Out of the Game
1. Going Unprepared
You will be asked to provide details, background information, financial records, cash flow projections, detailed business-plans, case for loan, personal data and credit status. Obviously the lender wants to know, but you should also be clear about the reasons why you need a loan. This helps get clarity on “how much” and “when.” Provide clear and relevant documentation on credit-history, amount of loan sought, your assets, business-plan and documentation.
2. Not Matching Term to Need
Seek long-term finance for property-purchase, short-term for meeting working-capital needs. Shop around. Even if you have a favorite/regular lender, there could be better options more suited to your needs. Approaching the wrong type or unsupportive lenders can lead to lost time, frustration and a negative impact on your credit-rating.
3. Miscalculating the Costs
All loans have costs added on – administration, set-up, discharge fees, etc. Factor these into your actual loan amount. Know the real interest-rates, hidden fees, fine print, intangible costs. This can save you a huge amount of money and time in the future.
If there’s no urgent need, avoid going to alternative lenders because the loan process is slow in conventional institutions. Look for faster processing times so you can get on with your plans quicker. Understand the basis of granting loans: The 5 C’s – capacity, collateral, capital, conditions, and character.
5. Not Doing Your Homework
Not fully understanding short-term/long-term loans can lead you to commit errors. Get the right type: Specific purposes require different options – e.g. secured loan, specialized financing, business-specific etc. Get advice from professional accountants, mentors, tax planners etc.
6. Not Asking For Feedback
Nearly half of all loan-applications are turned down, not once but multiple times. Get clarity on why your application was rejected: was it low credit-score or not meeting lender-eligibility criteria?
Small business-owners have to familiarize themselves with basic financing concepts, ask for professional guidance, be vigilant, keep their eyes open for details, have patience and know exactly what they want when they seek commercial loans.
A better understanding of what to steer clear of certainly goes a long way in promoting peace of mind and the financial success of your business.
Author: For tax accountants Sydney Stephen is the right person. He has worked as an accountant in a number of small to large accounting firms in Brisbane. In 2008 he founded Blake & Co Accountants and in 2009 he founded BrisTax. Professionally, he specializes in income tax. He has for many years had a keen interest in both business and technology.