Small business owners frequently apply for financing, and for a variety of reasons. Occasionally small business financing is required to get a business off the ground without the owner having to make expansive personal investments. Financing is also helpful in enabling businesses to invest in office equipment or supplies needed to carry out the job. Unfortunately, there are a handful of small business financing mistakes that business owners make.
Four Common Small Business Financing Mistakes
We all make mistakes, but when it comes to business, those mistakes can be costly. As it is, approximately 20% of small businesses fail within the first year. With statistics against them, small business owners need to do their homework to ensure that decisions are smart and positioned for growth.
- A poorly thought-out business plan. Perhaps one of the most significant of small business financing mistakes stems from a poor business plan. A business plan outlines its ambitions, articulates how those ambitions will be achieved, and summarizes why the business is in place, to begin with. Lenders often require business plans before financing is offered. So, when a business plan isn’t well-thought-out, business owners can find themselves with either not enough funding, too much funding, or the wrong funding altogether. This can be quite costly.
- Debt vs. using savings. Small business owners face a dilemma when they need funds to grow their business. It can be nerve-wracking when determining if you should rely on financing or the savings that your business has grown over the years. Though it can seem like a no-brainer to take cash from your savings account, you lose the ability to grow your business’s credit rating, and you may lose valuable tax benefits. Financing can come in quite handy to ensure your cash reserves remain strong and you develop a strong financial reputation that will serve you well in the future.
- Financing dependency. When you try to grow your business too quickly, it can become easy to rely on financing to get you by. Those interest payments can add up. But even worse, if you get into a pinch or something happens so that your business is slow for a while, not only can’t you make your payments, but you may start to take on late fees, all while that accumulated interest continues to grow. Though some financing is necessary, businesses should strive to get to the point where they have adequate cash reserves to not rely on lenders for every expense.
- Poor accounts-receivable collections. When your customers don’t pay you on time, it inevitably makes it harder to pay your own bills. This is a simple small business financing mistake that can be avoided. By adequately tracking invoices and expenses and ensuring customers adhere to their payment terms, it becomes easy to ensure that revenue is reliable and that business financing debts are paid.
Avoiding these four mistakes and building appropriate business processes can help small business owners persevere and prosper, even when times are tough. No business wants to become a statistic. With diligence and an achievable growth plan, small business owners can easily find themselves as part of the 80% of small businesses that succeed.