5 Pitfalls to Avoid on a Commercial Business Loan

Commercial business loans allow business owners to expand operations or make it through a lapse in production. For most businesses, some degree of debt is absolutely necessary. However, all businesses must be careful to avoid common mistakes. 

#1 Not Shopping Around

New businesses receive a lot of offers for loans the second they open their doors. Everything from cash advances to high limit credit cards pour through the doors, and many owners are tempted to elect one of these options. Even good deals, though, can typically be made better through shopping around and negotiating. Taking the first offer for a loan does not allow an owner to compare the quote to others on the market and weigh pros and cons.

#2 Opting for Rigid Schedules

The best type of financing for most businesses is flexible revolving credit. Businesses, unlike households, cannot often predict how much money will be coming in the door each month. Getting locked into a high monthly payment can cause problems if the office has a slow month. Even though revolving lines tend to have higher interest rates, the flexibility will usually make up for the added expense. 

#3 Failing to Arrange Permanent Solutions

Temporary and short-term business loans have their advantages; they can be sourced very quickly to allow a business to get through an emergency need. However, all businesses will have ongoing needs for credit to apply from time to time. This means it is best to have a permanent funding solution in place as soon as possible. An open line of credit allows a business to make payments to vendors even if it has not yet received payments from clients. Without this ability, a business can fall into delinquent loan status through no fault of its own.

#4 Collateralizing Personal Assets

A bank or lender will usually be willing to take a personal asset in order to source a business loan. Some borrowers put their homes or cars on the line to help their business. This can be necessary in the very infancy of a business. However, as soon as the business is standing on its own, business assets should be used in lieu of personal assets to collateralize any loan option. Using personal assets creates a high amount of risk for the business owners. If the business does not meet its goals, the owner could end up losing a home or other asset.

#5 Not Reviewing Documents to Limit Liability

Even if a business owner's personal assets are not on the line, his or her credit may be. It is important to look over the terms of the loan to see where the liability falls. The business's name should be used instead of the business owners if it is a legally incorporated organization. Once a business has been operating for even a few years, it will have an independent credit score to be used in order to source the loan. If a business owner's score or name is used instead, then the business owner may have the loan permanently on his or her credit report.