Dangers of Small Business Loans You Didn’t Know About

0
365

Running a small business can be a stressful endeavor, especially when sales are down and you’re barely breaking even. Many small business owners turn to lenders for financing, but this practice doesn’t always work out in your favor. 

Let’s take a look at the dangers or risks you’d be taking on if you decide to get a small business loan. 

Questions to Ask Yourself Before Getting A Loan

Before you go one making huge small business financing mistakes, you’ll need to thoroughly examine the reasons you are looking for a loan in the first place. It’s a serious business decision that shouldn’t be taken lightly. Here are a few questions you can ask to help you with that decision:

  • Will the loan help you generate more revenue? 

You don’t want to get a loan simply to cover operational costs, because they do not generate revenue—at least not directly. In this sense, you’d be borrowing money to keep your business afloat, and won’t have any way of paying that money back. Remember that money won’t fix the issues that have put you in the situation you’re in. 

  • Do you understand all the terms of the loan you’re considering?

Too many small business owners sign the papers on a loan without considering the fine print. Always make sure you understand the terms and conditions on your loan, no matter how small. Some loans look cheaper at first glance. But when you sit down and calculate the exact terms of your loans—you realize that you’re paying a lot more in total. Hire a professional to break it down for you if need be. Just don’t sign anything unless you fully understand every detail. 

The Risks Of Small Business Financing You Need To Consider

Even though small business financing is a standard practice that most new entrepreneurs will likely consider, there are many hidden risks. Failing to acknowledge these dangers can be devastating for the business, so consider the following carefully.

Personal Guarantees Mean You’ve Got A Lot At Stake

Many banks will ask for a personal guarantee to ensure that the bank covers their losses if you don’t pay on time. In layman’s terms, this means you are personal assets (home, car, etc) are at risk of being seized by the bank if you are late for your payments. 

You’re probably telling yourself that no one takes out a loan with the intention of being late on their payments. Who would be that irresponsible! However, there are no guarantees in a competitive market. You need to consider that this is a liability and if you aren’t confident in your ability to pay off the loan, you’re at risk of losing your personal assets.  

Changing Interest Rates

Make sure to check the interest rates on your loan, because there are two types: fixed and variable. While a variable rate might be lower initially, the changes over time make it more difficult to predict your monthly liabilities. 

Fixed rates will not fluctuate over time, and the predictability makes it a lot easier to make a full payment. You just need to plan for the payment ahead of time. 

Lenders Are Under No Obligation To Educate You

Unlikes other types of loans (consumer), there is no laws forcing small business lenders to be fully transparent with you on the percentage rate. This means that the bank is fully within their right to hide how much the total cost of the loan is. It’s entirely up to you to figure that out. 

Again, if you aren’t confident in your ability to calculate and decipher the terms of a small business, hire a professional. As long as you are consulting with someone who doesn’t work for the bank, you would likely get sound advice. 

Credit Score Impact

Paying off your personal loans is a lot easier than paying a business loan. However, the impact your credit score tends to be much more severe if you miss a payment. Even your personal credit score will reflect any missing payments.

Many small business owners fail to realize how big of an impact your loan payments have on your personal and business score. So, make sure that you are capable of making every single payment on time.

Final Thoughts

Banks allow small businesses a variety of options to borrow money. While this is ultimately a good thing that can boost your business, educating yourself is crucial here. Knowing the speicifc terms of your loan and the total cost should be a deciding factor on whether you can afford the loan at all.

Once again, remember to only borrow money if that money will increase your revenue. Do not borrow just so you can run your business, as that’s a recipe fo disaster. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here