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The Mistakes In Borrowing Money

Dec 12, 2023 | Budgeting, Business planning, Money, self employed

The Mistakes In Borrowing Money
 

Are thinking of getting a loan? Did you know that there are mistakes in borrowing money? So the logical question is: 

Do you want to know how to avoid those pitfalls?

Here are four simple steps to follow so that you can be on your way to avoiding those common mistakes when borrowing money for your business.

Loans (overview)

Loans are an important part of any business. They can help you grow your company, invest in the future, or even just pay off some bills. But loans come with their own set of risks and challenges that need to be considered before signing on the dotted line. That’s why it’s so important to know what you’re getting into before taking out a loan from a bank or other lender.

What are the mistakes in borrowing money?

This blog (and video) will teach you how to avoid those common mistakes when borrowing money for your business. And it will do so by teaching you about cost, risk, attitude and planning (or C.R.A.P.).

To begin with, think about the cost of that loan. What is it going to cost me in terms of interest rates and other fees? 

Then, think about risk – what are the risks associated with this type of loan? 

Next, think about attitude – do I have the right attitude towards this type of debt? 

And finally, plan – have I planned how much money I’m going to need from my loans over time so that they work well with my cash flow projections? 

If you can answer yes to all four questions, then congratulations! You’ve avoided those common mistakes when borrowing money for your business.

The cost of a loan

Firstly – C is about cost! When considering loans, think about what the cost of that loan will be over time. It might not seem like much now, but interest rates add up quickly!

And don’t forget to consider opportunity costs as well – if this money were invested elsewhere, it could have grown more than it would have had it been used as collateral on a loan instead. So, make sure not only do we factor in all these costs but also our attitude towards risk when making decisions around borrowing money for our businesses! Lastly, we’ll talk about planning – because without proper planning there’s no way we’ll succeed at anything in life! We want to plan so that we can take care of ourselves financially and still maintain control over our lives while running our businesses successfully too!

There’s also the cost in terms of time taken and charges for the initial application, the loan type, repayment or interest only, interest charged and any penalties for earlier repayments. Make sure you include these in your calculations to avoid making this first mistake from the four mistakes in borrowing money.

Your risk appetite

Risk appetite can be defined as our attitude to risk, and it differs for all of us. You may be cautious and risk averse, or you see things differently and are risk seeking. Taking on loans is extra risk for your business – repayments are due whether sales are zero or not. So, you see why this is on our list of mistakes when borrowing money.

The thing is, your operating gearing changes. It’s really important to take that into consideration when deciding to take a loan and agreeing to the Ts&Cs of the bank. Why not check out our FREE Online calculator to see the impact! Moreover, risk carries opportunity.

Understanding your personal tolerance for taking risks will help you make better decisions in life and in business! Our FREE online calculator takes just seconds to complete! Its easy-to-use interface makes it simple to understand and use.

Your attitude changes everything

The biggest battle in your business is the one between your ears. I’ve seen it, experienced it, the fight is real. Your attitude to investing in your business, managing debt, and money all contribute to what the trajectory of your business will be like. Naturally, a stroke of luck here and there also adds to the story.

But coming back to debt, it has become a bit of a dirty word. Your reluctance to borrow i.e. your wariness of it may restrict your business growth. It may stop your ideas becoming a reality. Being wary of debt, and exercising caution is good. But don’t discount it as an option. Borrowing is about financing your path to achieving your goals. 

Your plan

What role does your cash flow forecast play in the mistakes in borrowing money? Simply everything! You might be wondering how much cash flow you have and when it will come in.  Your borrowing decision is driven by your cash flow forecast. Your cash flow is a financial reflection of your journey towards achieving your goals.

Get your cash flow sorted as a priority, then figure out if you do not need to borrow, how much, when, and how much you need. No cash flow makes for a foolish borrowing decision.

A cash flow forecast is an important tool for any business owner. It helps you determine whether or not your company will be able to repay its debt and stay afloat in the future. If you don’t have a plan, it’s time to get one!

Click the link below to get our FREE cash flow guide, book onto our webinar ‘How to Take Control of Your Business CashFlow with the ABC Method’.

You’ll be pleased to know how to make sound decisions about borrowing when you need that funding – whether you do actually need that funding, how much you need, and can you afford to pay it back.

Conclusion: mistakes in borrowing money

Borrowing can be great way to finance growth, moving your business forward and realising your goals. But! there’s always a but, you need to know how to avoid the common mistakes when you borrow money.

Our FREE online business calculators are here to help you get a better understanding about your numbers, making profit, giving you options, saving you time, improving your money mindset. and setting your goals. Get a better understanding of your numbers. Type in your numbers and see what they say!

Sign up for your  FREE trial to Numbers Knowhow, the revolutionary cashflow software designed to empower you with the numbers you need to transform your business. With Numbers Knowhow, you’ll have access to powerful tools and features that will unlock a world of financial understanding and growth.

 

Plan it. Do it. Profit