Reasons Why Your Business Loan Didn’t Work Well
Nov 06, 2022
You applied for a business loan with a particular target in mind and, after undergoing all the hassle, even succeeded in getting one. Once you were ready and all set with the newly acquired funds in your account, you implemented various changes that your business required.
However, a few months later, you realised that things were going differently than they were supposed to. The positive cash flows and profits you expected to generate did not materialise!
Have you wondered why this has happened? Why did your business fail to achieve its goals despite having enough funds?
Let us look at the five possible reasons that may have caused issues that rendered the business loan ineffective in turning the tide in your favour.
1. Borrowing decision
Whether you require a business loan is a decision that needs much thought. Getting a business loan without any calculations may leave your business with unnecessary debts. It might be the case that you have sufficient funds to get your business going, but due to some uncalculated reasons, you end up applying for a business loan.
Financing your business involves strategic planning. It requires an assessment of your total finances, operating and capital expenditure, demand, and supply surveys, working capital needs, and marketing strategies. Analysing the usage of funds for each activity will give you a clear idea of whether you require a business loan.
If you cannot arrange or fall short of funds for the various activities and business needs, then, and only then, you can think of financing your business externally through a business loan.
There are better ways to make this decision than taking a loan just for additional finance or because lenders make lucrative offers. Random decisions regarding business finance can be one of the main factors that affect your business outcomes.
2. Business loan amount
Once you have made all the necessary calculations and decided that you require a business loan, there is another crucial decision: how much will you borrow? If you fail to assess this correctly, another blunder is created. Sometimes it becomes necessary to get expert advice on business finance matters. Such advice can help you properly judge your business’s financial health and take debts accordingly.
The borrowing amount is important to be decided beforehand because there can be a possibility of underestimating or overestimating the required funds. When you underestimate the required funds, you will get undesired results. Vice-versa, if you overestimate the funds required, you will be left with surplus funds in your account, which you may need to utilise appropriately to generate profit.
Let us take an example here. You allocated an ad-hoc amount for your marketing needs. However, in reality, you realise that the funds are insufficient, and you cannot market your products or services effectively. This would again have an impact on your sales which is undesirable.
Having surplus funds in your account might come across as a boon initially. However, this will likely cause problems because you now have a larger amount to repay. This surplus availability may also lead to excessive spending, which is a major setback in the long-term perspective.
3. Unplanned budgets and spending habits
Keeping a check on spending and capping expenses is of utmost importance while utilising your business loan amount. Even if you have acquired a business loan of the exact amount needed, whether you would benefit from it depends on your spending habits. How are you going to spend the money that you have borrowed? Here, the role of planning is quite important.
Commencing a business, even if it is small, requires adequate planning. Adequate planning implies that you plan out all your needs individually, including your basic business needs. This will help you allocate reasonable funds for every need based on its particular requirement.
If you allocate ad-hoc amounts to certain business needs or spend the money in one go, you will undoubtedly face a fund shortage. This is yet another reason that creates a hindrance in your progress. Hence, it is important to eliminate unplanned budgets and spending and implement a planned approach to use the available funds optimally.
4. Using the business loan for something other than its intended purpose
When you plan for a business loan with a set objective, make sure that objective is achieved. It is important to ensure that the business loan fund is only spent on the intended purpose.
You might have decided to borrow funds for your increasing marketing needs. However, inventory issues might arise, and you would divert the funds to solve those. Diversion of funds to other needs may mess up your budget and leave you with an unplanned debt. This will eventually create major problems for the business in the long run.
This example of using up the marketing funds for inventory issues is just one of the many things that could go wrong. Once it is decided that a particular objective needs to be achieved from the funds allocated for a certain need, you have to ensure that it is thoroughly followed. If not, you are on the path of creating another blunder.
5. Debt repayment schedule
Debt repayment with a fixed schedule is crucial for you to manage. Managing the entire business loan amount with a disciplined repayment schedule becomes easier.
Missing payment dates is one of the many reasons why your business loan didn’t work well, instead of proving a boon, backfires at times. Moreover, if payments are made per schedule, your business can avoid additional expenses in the form of interest and penalties. You have to then pay more money to the lender, which will cause a fund crunch in the business.
Adding your payment due dates to your calendar and keeping that cash ready despite ongoing tasks is a must. This will ensure you avoid unnecessary cash outflows in the form of penalties and interest.
Applying for a business loan or planning a business loan is no rocket science. Once you have succeeded in obtaining the funds required, all you need to do is make sure you are consistently chasing your goals and objectives. Diversion on these fronts will affect your business outcomes and leave you wondering where it went wrong.
It is also important to revisit your financial strategies frequently. You might be required to undergo strategic changes per prevailing market situations and industry conditions. This would impact your spending and budget.
If you feel your business loan is not giving you the desired results or not working well, there is always time to turn the tables. Focus on utilising the remaining funds wisely. Seeking expert advice can always help.
When it comes to building strategies, an alternative must always be ready. Not all things go as you plan due to some external factors that you may not be able to control. Having an alternative to a certain plan or strategy ensures that you are staying within your objectives, and once that is confirmed, there is no reason for your business loan not to work well.