What is your perception of business loans? If you are like most entrepreneurs, you see them as the lifeblood of what you do. Without the right selection of loans to help manage your cash flow, your business would not survive. Fair enough. But did you know that business loans can ruin your business just as easily as rescue it?
Business loans are just a tool. In and of themselves, they cannot make or break your business. Use loans properly and they can be instrumental in accomplishing everything from capital improvements to adding staff. Use them improperly and they will become a ponderous chain that drags your business into dangerous territory.
It is assumed that most business owners know how to use business loans from a practical standpoint. So instead, here are five ways to keep those loans from ruining your business:
- Only Borrow What You Need
Business borrowing is a lot like consumer credit inasmuch as overextending yourself is a recipe for disaster. If you have so many loans that you cannot keep up with monthly payments, you are going to begin to default. It will not end well.
Here’s the point: only borrow what you need. If you need £10,000 to buy new equipment, don’t borrow twice that amount in order to pad your bank account with extra cash. Stick with the original £10,000 and leave it at that.
- Don’t View Loans as Revenue
Business owners who find themselves in trouble with their loans are often in a position of viewing those loans as revenue. But loans are borrowed money, not earned money. It is important to keep that perspective. Otherwise, money from loans can skew your understanding of where your business is financially. It can create a distorted picture that doesn’t allow you to see your true cash flow position.
- Pay Them Off as Quickly as Possible
There are some in the business world who would argue that carrying a certain level of debt is a good thing. Others would disagree. The position taken here is that you pay off business loans as quickly as possible. For all of the benefits you might derive from borrowing, there’s no denying the fact that loans cost money. The money you are spending to maintain your debt is money being taken off your company’s profit statement.
- Keep Your Options Open
Business loans from traditional banks are one of many options for financing your business. There are also private lenders, equity investors, angel investors, peer-to-peer financing, crowd funding, and even gifts from family members and friends. Do not limit your options.
Keeping your options open makes it possible for you to seek the best kind of financing for each particular situation. A bank loan may be appropriate for one situation while private lending may be better for another. Future circumstances might dictate that a crowd funding campaign is the best option to meet a particular need.
When you limit your options, you become a prisoner to those options. That is the point when your lender starts controlling how you run your business. It is not a good place to be.
- Do Not Obsess over Financing
Finally, do not obsess over financing. There is more to business than seeking loans, spending the money, and hoping you generate enough revenues to pay back what you borrowed. Bank loans are only one solution to limited cash flow. Maybe you should consider cutting expenses instead; or maybe your real problem is that you’re not paying attention to your receivables.
This post began with the premise that business loans are tool. They are not the only tool. Do not allow yourself to obsess over funding to the degree that you miss every other need or opportunity that comes your way. Keep financing in its proper perspective and look for ways to manage cash flow without having to borrow. You might discover that you don’t need your bank as much as you thought you did.
Now you know how to keep business loans from ruining your business. Perhaps what you read here constitutes things you never thought of before. That’s good. You now have a different perspective to contemplate as you seek to move your business forward.
