10 Dos and Don’ts of Managing Your First Business Loan
To launch any small- or medium-sized enterprise (SME) or startup, you’ll need the capital to pay for rent, labor, overhead, business technologies, and other vital expenses. Most new entrepreneurs need an extra financial boost before starting their business and getting on track toward breaking even. That’s where the best loans for businesses from banking institutions and other creditors come into play.
The moment you secure your first business loan can be pivotal for your overall entrepreneurial journey. But whether it becomes a value-adding arrangement or a heavy long-term debt on your business depends on how you manage it. Ensure that your first business loan puts you in a favorable position to earn money and repay its debts on time by following dos and don’ts.
The Dos:
1. Do Have a Clear Idea of How Your Business Loan Supports Your Business Plan
One of the first things you should do before applying for a business banking loan is to think about how that loan fits into your overall business plan. On top of helping you and your management team stay on track with your goals, this information will also be valuable to your lenders. Suppose they can trust that you’ll be strategic about the money they lend you and see how conscientious you intend to be about your loan repayment. In that case, they’ll also be more confident about offering you loans with favorable terms.
Consider including financial projections, a breakdown of how the loan will be used (e.g., for equipment, working capital, or expansion), and a repayment strategy that’s as detailed as possible. Use this as a reference for your lenders and as part of your roadmap for your business’s growth.
2) Do Separate Your Business and Personal Funds
Next, make sure to keep your personal and business finances separate. Mixing the two can lead to confusion, accounting headaches, and even legal issues. Avoid these problems by opening a different bank account for your business and coursing your loan payments only through that account. Moreover, maintain a clear division of expenses, income, and funds allocated for loan repayment through proper bookkeeping and accounting practices. This separation will not only simplify your financial management; it will also allow you to demonstrate consistent professionalism to your lenders.
In the Philippines, SMEs can turn to Maya, a trusted digital bank that offers specialized financial solutions for SMEs. The Maya Business Deposit account offers 2.5% interest per annum on your deposit, four times higher than the average commercial bank, and requires no minimum deposit. It will also be easy to withdraw and manage your credit from a Maya Flexi-Loan through the Maya Business Deposit account. Through a solution like this, you need to worry about mixing up your personal and business finances or having a clear handle on your business’s cash flow situation and ability to make timely loan payments.
3) Do Borrow the Right Amount at the Right Time
Borrowing the right amount at the right time can make all the difference in your success with your first business loan. On the one hand, overborrowing can incite a “snowball effect” on your debt. On the other hand, under-borrowing may limit your ability to seize good business opportunities when momentum is on your side. When deciding how much to borrow, factor in your growth plans, working capital requirements, and current financial health.
Timing is equally important. Applying for a loan when your business can benefit from the extra cash can make it even more profitable and better equipped to manage debt. On the other hand, borrowing too early or too late can hinder your business’s potential and be a money drain you’ll have to stick within the long term.
4) Be Extra Aware of Your Business Income Relative to Your Loan Payments
If you’ve taken out a business loan, you should also work to have a good grasp of your business income and lean on the conservative side of your revenue projections. Overestimating your revenues can lead to unrealistic expectations and difficulty repaying your loan. Conversely, a conservative estimate will give you a safety net and allot enough for your amortization.
Base your projections on historical financial data and incorporate realistic assumptions into your financial reports. Also, err on the side of caution regarding factors like market conditions, customer trends, and other potential challenges.
5) Be Careful About How You Spend Your Money
Once officially approved for your business loan, be informed about where you allocate the loan funds and stick to your plan when making your business plan. Your financial discipline will ensure that the funds go precisely where they need to: toward your business growth and expansion.
Put the money loaned to you towards strategic investments that will yield returns and contribute to your business’s profitability. Some good examples include additional machinery or equipment to boost production or employee development for added services for clients. On the flip side, avoid frivolous expenses that do not directly benefit your bottom line, such as a company car or expensive company outings.
The Don’ts:
1. Don’t Settle on the First Lender Who Makes You an Offer
A common mistake among borrowers, including those who want to finance their businesses, is to rush into a loan agreement with the first lender. Different lenders offer varying terms and interest rates, and some have programs that are better tailored to micro-enterprises, while others are designed for larger companies like SMEs.
Take your time, shop around, and compare offers from multiple lenders. This is how you’ll come across the loan program with the most favorable terms, saving your business a lot of money in the long run.
It will also pay for you to cast a wide net regarding who your lender will be. Don’t just inquire at commercial banks; if you’re based in the Philippines, consider a digital bank like Maya that offers a business line of credit worth up to PHP 2 million.
2) Don’t Risk Your Assets
Some lenders require collateral, such as property, to secure a loan. While this can make it easier to obtain financing, it will also put your assets at risk. Consider alternatives, like unsecured loans or business assets, to mitigate this risk and protect your personal property. Some examples of unsecured assets are term loans, credit cards, and business lines of credit. The principle is the same as the abovementioned argument: don’t mix your personal and business assets when applying for your first business loan.
3) Don’t Be Too Focused on the Interest
While the business loan’s interest rate is a critical factor, it’s not the only one you should consider when applying for one. Being overly fixated on the interest rate may be detrimental to the other loan terms, which may otherwise be favorable to you.
Instead, review the entire loan package, including repayment schedules, fees, and any penalties for early repayment. Ultimately, a loan with a slightly higher interest rate and other more favorable terms may be the better choice for your business.
4) Don’t Be Late on Your Payments
Timely loan repayments are essential for maintaining a good credit history. Late payments can damage your credit rating and put you heavily in debt due to penalties and increased interest rates. You need to set up a reliable system for tracking and making payments to ensure you never miss a due date.
You can use calendars or apps to remind yourself of your business loan repayment schedule. It’s also possible to have an auto-debit arrangement for your account using a credit or debit card. This system guarantees you won’t miss a repayment and incur penalties.
5) Don’t Repay Your Loan Too Quickly
Lastly, it may seem counterintuitive, but repaying your loan too quickly can also be a mistake. For one, it can strain your business’s cash flow and limit your ability to spend on other things that could grow your business at that particular time. Another reason is that some lenders may demand prepayment fees since they’ll lose genuine interest on your loan if you are too early.
Get the best deal out of your loan by determining whether the interest saved would be worth paying your loan early. You may also want to consult a financial advisor about the right place for your loan repayment.
The prospect of taking out your first business loan may be scary, but you’ll gain valuable business experience when you do. While you may not be able to avoid all the pitfalls associated with handling your business loan, these tips should help you avoid the major ones and sharpen your overall financial strategy for your business.
