Many business owners have a difficult time securing a small business loan. There are numerous hoops to jump through involving everything from a perception of poor creditworthiness to mountains of paperwork and unimpressive collateral, all of which can bring the process to a halt. This could explain why, according to the U.S. Small Business Administration, a recent report found that only 27 percent of business owners who sought funding from banks actually received a business loan.
So if and when your loan does get approved, it's important for you to make sure that you spend your funds the right way. Here are five mistakes to avoid when deciding how to spend your business loan:
1. Spending Money on Minor Equipment Repairs
Sooner or later, most business-related equipment breaks down. Using your small business loan to repair this equipment or to purchase low-cost replacements isn't the best use of your loan money. "Your overdraft, credit card or line of credit can take care of this sort of thing and you can reserve business loans for larger and more strategic borrowing," notes business recovery specialist Carl Faulds in Business 2 Community.
2. Using Loans to Cover Everyday Expenses
A small business loan isn't designed to pay for recurring or everyday business expenses. Allocating these funds to cover ongoing expenses can quickly drain your capital, leaving you with nothing to show for it (since, by definition, "ongoing" expenses will keep on coming). A wiser approach is to improve your cash-flow situation by more effectively managing your costs and working harder to ensure that you receive compensation from customers who are late on their payments.
3. Making Buying Decisions With the Intent to Impress Others
With cash in hand, it's easy to think that state-of-the-art technology should be a top-priority purchase. Similarly, you may feel the urge to spend an exorbitant amount of money on renting more space than your business needs in an exclusive part of town. Anything that can potentially drive your business deeper into debt is an unwise investment for capital acquired through a loan.
4. Hiring More Staff Members Than You Actually Need
While it's true that a growing business often needs to hire additional staff, doing so only because you secured a small business loan can be a costly mistake. Make sure that all new positions you create genuinely contribute to business growth. If a new position does not meet this requirement, you should hold off hiring and find other, more strategic uses for your funds.
5. Using Funds to Launch New Products Too Quickly
Sometimes getting a small business loan seems like the perfect opportunity to dive into new products and markets. But without proper research, this can prove to be a costly error. It may be wiser to invest the capital in upgrading your existing product line or finding new ways to please your loyal customer base.
Despite the inherent difficulties in securing financing, there are bright spots in the current small business loan forecast. Just be sure to spend the money in ways that promote the growth of your business.
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