How Not to Spend Your Business Loan

September 6, 2016

Getting a business loan isn’t easy, with banks having significantly tightened their criteria since 2008. Of course, your business could be in the lower-risk category, so you’ll strike lucky, or you might secure finance from an alternative lender applying different criteria. But having obtained the business loan you need, there are still several pitfalls you can encounter. Or to put it another way: how should you not spend your business loan?

1 Minor repairs

A defective printer, a malfunctioning telephone system or a damaged lock all need attention – sooner rather than later. However, this is not what a business loan is intended for. If you need to borrow a small amount for this type of issue, you will probably be taking a cash advance and paying a high level of interest. 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.

2 Low-cost equipment

Even if your printer or handset can’t be repaired, a business loan isn’t the best way to finance a replacement. Once again, if you’re looking at unexpected costs that run into a few hundred pounds, you probably have the financial arrangements in place to meet the expense without taking out a new loan.

3 Ongoing expenses

Business loans are not intended to deal with recurring expenses such as rent, business rates or bills. If your cash flow is so uneven that you are struggling to meet these commitments, this could indicate serious problems with your business model. Take on a loan to meet these payments and you will simply make the problem worse by increasing your monthly outgoings. Instead, try to deal with the problems at source – manage costs more carefully, encourage late-paying customers to be more prompt and negotiate more advantageous terms of business with your suppliers.

One excellent way to tame a troublesome cash flow is to implement invoice factoring or discounting. This allows you to borrow against the value of your invoices – typically up to 85% of the total – as soon as you issue them, with repayment being made when your customers pay you. With factoring, the finance company takes control of your debtor ledger and assigns experienced credit control professionals to secure early repayment, whilst with invoice discounting you manage your own accounts payable.

Of course, there are plenty of good reasons to take out a business loan and if you do it right you can use the loan to power business growth. You might wish to purchase a key piece of equipment and spread the costs over several years. You could be planning a major programme of expansion, requiring new people and premises. You may be about to launch a major marketing initiative involving substantial investment. By choosing the right loan from the right lender you can give your business a huge boost. Just make sure you spend the money on the right things.

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Author: Carl Faulds