You’re not alone if you’ve ever taken out a business loan that limited your business more than supported it. Whether it had confusing terms, sky-high fees, inflexible repayment schedules, or was simply a mismatch for your business model, a bad loan can leave you hesitant to borrow again.
However, the right funding solution can be the difference between stalling out and scaling up. The key is learning from past mistakes and approaching your next funding decision with more clarity, control, and confidence.
When you get a business loan this time, you set the terms. Here’s how to regain control of your business finances after getting burned by a loan.
Understand What Went Wrong
You can’t fix what you don’t understand. Before considering another funding option, you need to be brutally honest about what went wrong the last time. Reviewing your loan agreement and payment history allows you to see how the financing terms impacted your operations and avoid the same mistakes in the future.
Let’s say you took out a merchant cash advance (MCA) with daily payment withdrawals. But it choked your cash flow because your business gets paid biweekly. Recognizing this misalignment is the first step to choosing the right financing this time.
You also need to consider what caused the mismatch. Did the lender pressure you? Did you rush into the agreement? Did the loan terms hide fees and penalties? Knowing how you ended up with the wrong financing and which parts of the loan structures clash with your business model empowers you to choose the right funding product and lender.
Focus on a Funding Relationship
Working with the right lender can be the difference between another horror story and a successful financing. The best providers use their expertise to partner with you and help you succeed.
You might have to shop around to find the right fit for your business, especially if your last provider let you down. Look for lenders that:
- Understand your industry
- Frequently work with businesses of your size
- Take the time to learn your business goals
- Recommend catered solutions to customers
- Offer multiple funding products
- Customize terms to the borrower’s needs
- Prioritize transparency
- Warn about potential risks
- Simplify applications and agreements
- Provide support and guidance before and after you sign
How do you find this kind of funding relationship? Read client reviews and pay attention to patterns in their real-world experiences. Talk to funding company representatives. With the proper focus, you can find a trustworthy and supportive financing partner.
Match Your Loan to Your Business
Along with a compatible lender, you need to find a loan that matches your business model. Your experience actually gives you a leg up. You have eliminated a repayment structure, funding product, or loan term that didn’t work last time. Now, you can find financing that supports your business across the board.
Your Business Model
Find a repayment schedule that matches when your business gets paid. You may rely on daily sales. Or your clients might send electronic payments every month. Look for a payment plan with the frequency closest to your business model.
For example, weekly fixed payments toward a retail business loan could work if your shop sees steady daily transactions. On the other hand, medical businesses and construction companies typically send invoices and wait up to 90 days. A milestone-based loan or quarterly payments would better match their business model.
Your Sales Cycle
You might make money fairly consistently or depend on seasonal sales. But you need enough capital to make payments and operate your business for the life of the loan. Picking a term length that fits your sales cycle will keep your financing under your control.
Let’s say you run a seasonal business with extremely lean months. You could use a short-term loan to fund projects before the busy season. Then you can use the increased sales to completely pay off the loan before things slow down.
Your Cash Flow
Consider whether you have sufficient capital to make the same payment every time. If your cash flow is fairly consistent, loans with fixed payments may work for you. You might also prefer a set amount to simplify budgeting and financial planning.
However, many business owners need a more flexible repayment option. Some financing options, like revenue-based financing or an MCA, can withdraw a portion of your income to adjust payments with your cash flow. This flexibility often works for companies with daily card transactions or subscription services.
Other funding solutions tie repayments to incoming capital. With accounts receivable financing, for example, you use your invoices as collateral and repay the loan as your clients pay you. Some lenders specifically design medical or auto repair business loans that accommodate insurance payments and timelines.
Your Credit Goals
Your previous loan might have stalled your plans to build credit and damaged your confidence. But you can qualify for financing and regain momentum by applying for the right product.
When you have less-than-perfect credit, turn to working capital loans. You can typically qualify for this financing based on your revenue and time in business alone, though offering collateral can seal the deal or bring down the borrowing costs. These loans can help you regain your momentum.
If you have a decent credit history and want to improve it quickly, apply for a business credit card or low-limit line of credit that reports to the business credit bureaus. Just make sure you use the funds sparingly to repay them promptly. Your score and confidence will begin to rise.
Prepare and Ask Key Questions
When you need capital right now, you might rush through a funding conversation or have no idea what to ask the lender. So, prepare a list of non-negotiable questions ahead of time.
When you’re prepared to ask the right questions, you shift the balance of power back in your favor. Consider using questions like these:
- What is the total payback amount for the loan?
- Are there any origination fees, maintenance fees, or penalties?
- How long will it take to repay on the current schedule?
- Can I adjust the repayment schedule?
- What happens if I miss a payment?
- Can I access more funds if my capital needs change?
- What happens if I default on the loan?
- How do I contact a real person with more questions?
Prioritize transparency. Don’t sign if you’re unsure about the agreement. Ask for another explanation or time to review the contract with a financial advisor. A trustworthy lender will give you the time and answers you need to make an informed decision.
Make This Your Turning Point
No one wants to get burned by a bad loan, but you decide how your experience will impact your future. If you look at where things went wrong and change your approach to financing, you can be a more informed and empowered borrower.
Make this your turning point. Ask questions, choose your funding partners wisely, and align your financing to your business’s rhythm and goals. Use the hard lessons you’ve learned to take control of your next funding decision.
