With banks so recalcitrant about lending money to desperate small businesses, quite a few unsuitable lenders have come out of the woodwork trying to exploit them. Now if you do your research properly, you’ll find that you have a lot more options than just getting a loan from a bank.
Your options for getting a working capital business loan can include factoring companies, crowdfunding, and other digital sources. But not all lenders are created equal, and some of them may actually do more harm than good for your company.
So when trying to obtain financing for a business, watch out for the following dangers:
Business Plan Providers
If you’ve ever tried asking a loan from a bank, then you know that one of the documents they’ll want you to submit is a proper working business plan. But some small business owners don’t know how to create one nor do they know how to make a financial forecast for their company.
Because of this, some “professionals” may offer to write your business plan and financial forecast for you. They’ll say that these will give you have a better chance of getting that working capital business loan you need from the bank.
But there’s a bigger problem here. You need to learn this skill of developing your own business plans and financial projections. By learning how to do these things, you make sure that as a small business owner you know what you’re doing. You’re familiar with the nuts and bolts of your business and you’re aware of what your goals are for growth.
Developing this understanding will help your business succeed, because you have a more accurate idea of how it works now, and how it should work in the future.
Business Credit Services
Again, it’s true that if you’re asking for a loan then your business credit is going to be very relevant, and you need top rating for your bank to approve the loan you ask for. That’s why there are business credit services offering to help you improve your business credit.
But when getting a loan, your personal credit is actually more important. That’s because your bank will insist that you be personally responsible for the loan, whether your business succeeds or not.
And in some cases, you don’t need business credit at all. Lenders don’t expect startups to have a strong business credit because by definition they don’t have much of a history to go with. And in accounts receivable factoring, your personal credit is much less important compared to the credit of your customers.
Some people may use the wrong factoring companies or credit cards to fund their business, and find out later that they’re paying more than they were expecting. When you’re using any lending option, you need to read the fine print and make sure that there are no hidden fees.
Discuss the loan with your lender and get assurances regarding the terms and fees. Make sure to put your agreements into writing.