When a business owner takes out a loan to fund their business or keep it afloat while building the business, it can be easy to get carried away. This valuable resource becomes a hindrance and can damage one’s credit and quality of life. As such, it is crucial to practice responsibility when borrowing.
Here are five ways to borrow money responsibly, fueling anyone’s success as a business owner rather than causing their downfall.
Create a Business Plan
Creating a business plan doesn’t directly relate to borrowing money, but it does help an owner establish how much they need and crafts the guidelines for what they should borrow. A business plan also gives the owner a blueprint for their business, which will help them become more successful overall. If a business owner sticks to the plan and becomes successful, paying back their loans becomes easier, and they won’t have to borrow as much in the long run. If they do still borrow, it will be to make their business bigger and better in a smart, strategic way.
Only Take What is Needed to Get Started
If starting a business, learn more about consumer responsibility and put it into practice when borrowing money. Rather than buying luxury business items, take a conservative approach. If a $50 printer will do the same job as a $250 printer, opt for the former. If it’s possible to get by with one work truck until business picks up, do so, and get another when business demand supports it. Only take what is needed to get the business rolling or take a payday loan if replacing income in the early months of the business.
Don’t rush through the process of finding a lender. Shop around through various banks and agencies to compare interest rates, payment times, minimum borrowing limits, etc. Read the fine print and don’t hesitate to ask for clarification on early payment penalties and other caveats. Now is not the time to be prideful– you can ask to have it explained to you as though you were an elementary school student if that’s what it takes to understand.
Know The Numbers
As a business owner, you should always have an idea of where your debt-to-income ratio is. That is, how much you owe versus how much you are making. If you can’t keep track of your numbers on a daily or weekly basis, at least set aside time to update it monthly. Failure to do so may result in a nasty surprise when tax time rolls around.
Being mindful of your numbers will also reduce the risk that you overextend your business or purchase unnecessary items. It will encourage you to think critically about how you can offset costs and find money for emergency situations, such as equipment failure.
Don’t Rush to Pay it Back
If business is booming, it can be tempting to pay off a loan entirely to get rid of a pesky debt. However, if your debt-to-income ratio is good, stick to the original payment plan. For one, this will prevent you from running into any early payment fees. Secondly, timely debt payment improves your credit rating which improves your ability to set up an account with a vendor or get loans in the future.
Finally, things change quickly when you own a business. If you pay back the excess too early, then find yourself in need of money, you can damage your business over a simple miscalculation. Keeping the loan open and paying it back on time means that you will have access to emergency funds should your equipment require repairs, your business needs starts growing rapidly, or if you lose an important client.
When borrowing, be smart and think critically. Ask the experts for help in choosing the right type of loan for your unique situation.