Obtaining funding is essential to starting your small business. Sadly, most startups fail, often because of avoidable financial missteps. Here are five ways young companies commonly get themselves into trouble with startup loans.

1. Using Unscrupulous Lenders

Qualified lenders analyze both your business and personal credit ratios, along with projected cash flow and credit score, to determine how much they can comfortably lend you. Stay away from institutions that fail to check these metrics. Not doing so could mean you are accepting a loan that will be difficult to pay back. 

2. Ignoring Annual Percentage Rates

APRs tell customers exactly how much they are paying for the money they borrow. Not sufficiently recognizing this figure makes it impossible to calculate an agreement’s true cost. Budgeting becomes extremely difficult and debt often results. Lenders should be upfront with their interest rates. If not, seek a financial representative that has greater transparency.

3. Overlooking Fees

Loan agreements are never simply about interest rates. Lending institutions typically hit patrons with hidden charges that can seriously add up. Initiation fees are the most common and can account for as much as 4% of the total loan. Watch out for administrative fees, due diligence fees and contract fees. Ask your lender for explicit disclosure of every expenditure for which you will be responsible.

4. Never Requesting Feedback

When many budding entrepreneurs get turned down for a loan, they simply walk away and apply elsewhere. Naturally, they continually get rejected, as the problem that originally caused them to lose out has not been corrected. Keep this from happening to you by talking with any refusing lender. Ask what determined his or her decision. That way, you will be armed with specific knowledge that can be applied toward making your next loan application a success.

5. Accepting the Wrong Kind of Loan

If you require a short-term loan, a long-term loan will saddle you with unnecessary expense. When a long-term loan is needed, a short-term loan can leave you suddenly without essential operating cash. Conscientiously go over your business plan so that you know exactly how much you’ll need over what period of time. Avoid a fiscal emergency by getting the right type of loan for your enterprise.

Any small business requires capital to get started. Acquiring the money that’s needed can come with pitfalls that might potentially end your venture. Use caution and act wisely when considering any lending scenario.