Running a small business is an all-consuming endeavor, and many small business owners and entrepreneurs are often so busy running their businesses that they don’t slow down and pump the breaks when it comes to weighing all of their financial options. Avoid making these five common small business financing mistakes that could wind up costing you time and money.
1. Not Doing the Research
Not doing research on all loan options before seeking a loan is one of the biggest mistakes a small business owner can make. You wouldn’t blindly buy new packaging for your product in bulk from one company without comparing prices and materials with other companies, and the same logic should apply for seeking a loan. There are hundreds of loan programs available to small businesses. Start by considering the ones that will offer you affordable money with reasonable interest rates and long amortization periods. If you don’t qualify for these types of loans due to lack of credit, poor financials, or limited collateral, then you may research options within the alternative lending space. Not knowing your options can end up costing you significantly more money in the long run, so it’s best to put the time into doing the research up front. For example, jumping into a cash advance because the money is fast and convenient could easily have you paying back much more money over time than if you considered a U.S. Small Business Administration (SBA) loan, purchase order financing, or another loan program before signing on the dotted line for the merchant cash advance.
2. Seeking Too Much Money
To me, this is a no-brainer: only borrow what you need. But for many small business owners, visions of grandeur and 10-year plans cloud their judgment when it comes to determining how much money their business really needs. A loan should be seen as more of a bridge than a permanent solution. Borrowed money should carry you into the next stage of your business, not be a crutch to get you through the next 10 years. Borrowing a large sum of money may financially strap your business long term, while borrowing a smaller amount of money will decrease the monthly payments and the number of years you’ll be paying off the loan. Before committing to a large loan, think about how much money you actually need, and more importantly, what your business can afford to pay back. A business loan can affect your day-to-day
3. Placing All Trust in Your Partner
A business relationship is like a marriage. Without equally sharing responsibilities, being on the same page with financial obligations, and having open communication and similar visions for the future, both types of relationships are likely to fail. Before taking on a business partner, you should vet your potential partner to make sure he or she is a good fit for you and the business. Your potential partner will likely be doing the same to you, as should be the case. Take your time in considering a business partner by looking into his or her past employment, experience with running a business in your industry, how his or her home life will affect your working relationship, and how committed you think he or she will be to the long-term goals of the company. If a business partnership doesn’t seem like it will work, it’s best to break ties early on before both of you are legally and financially bound to the business. This same type of logic also should be applied when seeking investors or lenders. There are thousands of options for small businesses when it comes to investors and lenders, and not all of them will be the right fit for you and your business. Ask loan officers about their personal approval rate within their company and their history with businesses in your industry. Ask potential investors about their previous investments and what their involvement will be in helping your business grow. Lenders and investors will be interviewing you to see if you’re a good fit for them, and you should feel comfortable approaching them in much of the same manner.
4. No Emergency Cash Stash
When the business is growing and cash flow is steady, take time to not only appreciate the successes, but also set aside an emergency cash stash for the future. Too many businesses dip into their profits for unnecessary purchases or increases in salaries without putting money into an emergency fund that could help the business should an unexpected circumstance arise. Reinvesting in your business is critical, but so is staying out of debt (if possible) and keeping a business running smoothly even in the face of adversity. An emergency cash stash will come in handy should you experience a rough patch or slow season. It’s recommended that small businesses aim to set aside enough cash to operate for six months to a year should the business need this crutch. Even if this cash stash won’t cover all of your operating expenses should an emergency arise, it will greatly reduce the amount of borrowed money you need to seek if a loan is necessary.
5. Being Disorganized
Out-of-date, disorganized financials are one of the biggest roadblocks both borrowers and lenders deal with when it comes to financing. If you don’t have your financials current and accessible, it can seriously hinder your chances of receiving financing for your business. When business financials aren’t up-to-date, there are holes in balance sheets or missing