Choosing a Lender? Watch Out for These Costly Traps. Eager entrepreneurs in search of startup capital should be especially wary of unnecessary services during the small-business loan process.
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Small-business owners seeking financing have hundreds of options thanks to a proliferation of lending firms and programs offering fast and easy solutions. But the reality is only a few of these choices will be the right fit for your nascent business. Although the lure of quick cash regardless of personal credit can be tempting, be wary of common traps when considering a lender for your company:
1. Know when business credit services are necessary -- and when they absolutely are not. While business credit can be important as your businesses matures, it doesn't make a difference for a startup applying for a loan. Startups are not expected to have a strong business credit file, so any firm extolling the necessity of business credit services to apply for a loan may actually be doing you a disservice.
Instead, concentrate on the strength of your personal credit, as lenders will focus on this more because you will ultimately be responsible for paying back the loan.
2. Know the price you pay for speed and convenience. Some short-term lenders and cash advance companies offer so-called "fast" loans with quick application processes and a lax review of personal credit. This speed and convenience comes at a cost, however. Entrepreneurs should be careful when considering a cash advance, especially if rates and pay off timeframes are extremely harsh. Some firms offer annualized percentage rates as high as 200 percent with amortizations as slow as three to four months -- terms like these can be a nail in the coffin before a business is even birthed.
Protect your business by reading all terms carefully and make sure you have a clear plan to pay back the loan before signing on the dotted line for a cash advance.
Related: The Small-Business Guide to Getting the Cash You Need
3. Don't outsource; know your own business plan. Be wary of any company insisting that you need a business plan and financial forecast in order to sell you an expensive business plan package. Additionally, if you're paying someone else to do this work for you, then your business may have bigger problems. Having a direct hand in developing the business plan and financial projections ensures that you as the business owner know the ins and outs of the company and have defined goals for growth.
Have a good understanding of what makes your business tick in the present, and where it is realistically headed in the future to protect it from other unnecessary expenditures that you may encounter throughout the startup journey.
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