With so many financing programs on the market, finding one that meets the specific needs of your small business is no easy task. Small business owners need to invest the time and effort to understand the options available to them in order to make the right choice to meet their goals and objectives.
Knowing your lender and being clear about exactly what you are agreeing to is just as important as being able to secure the funding you need to grow. Small business owners often fail to do adequate research or miss the vital details when assessing whether to borrow or not, which can result in costly mistakes. With this in mind, here are five common financing pitfalls and tips to help you avoid them.
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1 – Borrowing More (or Less) Than You Need
Before you borrow money for your small business, you should have a solid idea of how much you need and how you will use the funds. Many small business owners borrow too much money, spend it unwisely, and end up with debt they are unable to service. On the other hand, insufficient financing could leave you facing a cash crunch if unexpected expenses arise.
To help you decide the amount of financing your business needs, here are some key questions to ask yourself:
- What do you need the money for?
- How quickly do you need it?
- What is the current financial shape of your business?
- How much collateral, if any, do you have to put up for the loan?
- Do you feel confident that you can pay back the loan on time?
Answering these questions will help you determine how much money you need as well as what type of business loan and lender to pursue.
2 – Not Keeping Your Financials Current
One of the keys to optimal business performance is tracking your financials and being diligent about keeping your records up to date. Maintaining accurate financial records is even more critical if you plan to look for financing. Prospective lenders are likely to request sales revenue, profit and loss documents, tax statements, and other financial data to determine the viability of your business. Failure to respond quickly with this information could put your approval in jeopardy.
If you haven’t already, invest in an accounting software system to simplify the process of managing your business financials. These programs help ensure accuracy and can also speed up your cash flow, reduce costs, and improve your budgeting. You might also consider working with an accountant who specializes in small businesses and can assist with cash flow review and forecasting and offer advice on ways to improve efficiency.
3 – Limiting Your Options
One of the biggest mistakes a small business owner can make is to not thoroughly research all available financing options. There are numerous lending programs available to small business owners, from government-backed grants and traditional bank loans to cash advances and asset-based lines of credit. However, on average, 58% of small business owners do not shop around when searching for loans.
Lenders are all vying for your business, so take the time to research what’s available and decide which is the best fit given the stage of your business, your revenue, and margins. Make sure you are realistic about your chances of accessing different funding options based on what lenders require.
4 – Failing to Conduct Due Diligence
It is essential that you conduct due diligence on any lender you are seriously considering working with, even if they have been referred to you or have a recognizable name. This can be as simple as a Google search using the lender’s name followed by the words “fraud”, “scam”, or “lawsuit.” The Better Business Bureau is a good source for information regarding complaints made about unfair terms or hidden costs, and your local Small Business Association office can help you determine a lender’s credibility.
With the rapid growth in online lending, it is important to keep in mind that these lenders are not regulated the same way as banks and other institutions. You need to be crystal clear on the details, including the annual percentage rates (APR) and cash flow implications. Some lenders, such as those offering merchant cash advances (MCAs), may require repayments made through fixed daily or weekly debits from your bank account, plus fees, until the advance is paid in full.
In addition, MCAs have been known to carry APRs that drive the total cost of a loan into the triple digits. For some small business owners, the high cost and daily repayment schedule associated with MCAs can actually add to their existing cash flow problems.
5 – Not Borrowing at the Right Time
Many small business owners wait until the need for financing is critical before they start looking, which can put undue pressure on your business and narrow your options. On the other hand, if you borrow too early, you may be tempted to spend the money on immediate needs instead of what you borrowed it for in the first place.
Running a successful small business requires planning and preparation. Taking a more strategic, proactive approach and seeking financing before your situation is urgent can make the borrowing process less stressful and more beneficial in the long run. Whether you need working capital to expand, purchase equipment, or add staff, planning in advance of when you need the money allows you to thoroughly investigate your financing options and find the best solution.
Keep in mind that one of the most important things about borrowing money for your small business is having the cash flow to service the debt. If you are not confident that your business can generate the revenue needed to make payments consistently and on time, this may not be the right time to take a loan.
Savvy small business owners know that financial mistakes can seriously impact the future of their business. Summit Financial Resources understands that securing the funding you need to grow is critical, and we are committed to helping you avoid potentially costly errors. Our working capital loans for small to medium-sized businesses involve using your accounts receivable and other assets as collateral. We create custom financing solutions with reasonable rates that provide the working capital you need – when you need it most.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.