The Dos And Don’ts of Business Debt
There are many times in business when you may need to borrow money. They can be useful for covering startup costs, for funding expansion or for simply covering bills when business is slow (or when clients are late paying). Of course, you do need to be careful when managing debts in order to keep long-term costs down and protect your business. Here are just a few dos and don’ts that are important when taking out business loans and paying back debts.
Do shop around for loans
Shopping around will help you to get the best deal. Most business owners borrow from a bank, but you can also consider private lenders and peer-to-peer loans. There may also be loans for specific purposes such as invoice factoring and merchant cash advances. You can even consider business credit cards and lines of credit.
Do consider your credit score
Having a good credit score will help you to access a better range of loans. You could also be eligible to lower interest rates as lender will trust you more. It could be worth cleaning up your credit score before borrowing a big loan (such as a loan for starting a business). There are credit builder schemes out there that you can use to help build your credit score up fast.
Do consider hiring a loan broker
A loan broker can help you to get the best deal on the market. They may have access to exclusive deals through close relationships with various lenders. Loan brokers may charge for their services, but you’ll still generally save money. They’re worth hiring when taking out large loans or when refinancing debts.
Don’t sign without reading the terms and conditions
Make sure that you know exactly what you’re signing up to when taking out a loan. By reading the terms and conditions, you can check that there aren’t any hidden fees that may crop in the future. For instance, some lenders may charge hefty interest for missing a payment and some may even charge you for paying your loan off early! You should also be careful of terms like ‘typical APR’ – this is the APR charged to 51% of borrowers, but it may not be the same rate that you are charged. By identifying any issues, you can then raise them with the lender and avoid paying more than you intended.
Don’t borrow more than you need
It’s worth doing the math first so that you can borrow exactly what you need. By borrowing extra money, you’ll simply add to your debts, resulting in more interest in the long run. If you’re borrowing money for repairs get quotes first rather than estimating the cost. The opposite can also happen if you estimate – you could end up borrowing too little, and asking to borrow extra could result in extra fees.
Don’t try to pay it back too fast
We’re often taught to pay more than the minimum debt repayment in order to pay off debts faster. However, paying off your debts too fast could give you less money to spend elsewhere. If you’ve only just launched your business, this extra money could be used to help expand and generate more profit. Unless you’re making much more money than you predicted, resist paying off your debts too early so that you’ve still got disposable income to throw into other parts of your business.
Don’t ignore supplier debts
It’s possible to accumulate debts with suppliers by getting into arrears. This could include energy providers, equipment suppliers or outsourced services such as cleaners or IT support. Some suppliers may charge late payment fees which may be outlined in your contract. Others may let debts build up and then ask for them all at once – threatening to seek legal action if the debts are not paid. Even if there isn’t this threat, it will likely damage your relationships with your suppliers and damage your company reputation overall if you don’t keep on top of these payments. Make these debts just as much as a priority as your loans and credit card bills.
Do consider setting yourself up as a limited company
If you’re unable to pay back your debts, your lenders may start to take legal action. This could include calling in debt collectors to settle the payment. If you’re running your business as a sole trader, you could find that you’re personally liable for any debts – this means that items in your home could be taken away to raise money for any outstanding business debts. By setting yourself up as a limited company, your business become legally separate from your personal finances and debt collectors can only seize goods owned by your business.
Do consider loan protection
Taking out loan protection can be useful if you fall ill and are unable to pay off the debt due to not being able to make an income. It can also ensure that any debts are paid off if you die, so you’re your family doesn’t have to pay these off. These business tips offer more information on loan protection. Some lenders may offer this. Alternatively, you may be able to seek out separate insurance to keep your loans protected.
Don’t ignore other forms of funding
Borrowing money may not be the only way to fund your needs. Saving up money could be an interest-free way of funding your needs. If you don’t have the time or patience to save up, another option could be to sell shares to investors or to raise money through crowdfunding. You may even be able to sell equipment within your business or make cuts to find funding. Debts should be a last resort as they can often incur the greatest costs in the long run.