Establishing a start-up and making it grow is not the easiest of things and despite what many people think it can be quite expensive too. Most of the times, you need to be spending lots of cash even before you can make the first sale. Almost all entrepreneurs need to borrow money because their savings are usually not adequate to fund all the expense of the venture. Picking the right source of funds can be a tricky affair and on top of that, there are a whole lot of financing pitfalls to avoid that can otherwise prove to be extremely expensive and can often turn the business turtle even before it had a proper chance to realize its potential. Fortunately, if you are alert, it can be easy to avoid making financial mistakes that can mean all the difference between a thriving business and an entrepreneurial disaster. Some small business financing mistakes to watch out for:
Borrowing More Funds than What the Business Can Sustain
When you are in a cash bind, it can be tempting to take out as large a loan as the lender is willing, however, your business needs to be able to use all the cash productively or else the repayments will put the cash flow under stress and start bleeding the company finances. The interest burden could be so large that you could end up deploying all your profits to pay it back. In some cases, if the profit generation is poor, loans beyond your capability to handle could end up ruining your business and personal credit. The trick is to objectively assess your fund requirement and limit your loan exposure to only what you can use to generate sales and profits. Money lying in the bank due to unutilized loans still attracts interest and can be a big drain on your finances. By being able to repay your loans on time, you can progressively improve your business credit so that taking on further loans as and when required will not be a problem.
Leveraging Debt Excessively
According to https://www.lendingtree.com, quoting data from the U.S. Bureau of Labor Statistics, around half of all small businesses fall by the wayside by the end of the fifth year. Survival for the first few years is the most important objective for entrepreneurs. While financing does allow the business to become stable, overcome lean periods, and keeps the business running, not being able to sustain it without external money can be a frightening prospect. If you take on too much debt, you could be extremely susceptible to downturns where your profit generation may not be sufficient to meet your debt repayment obligations. It might be possible to hang on by taking on more debt; however, unless you become profitable very quickly, the debt burden will pull you under.
Not Considering All Funding Options
With small business loans becoming more easily accessible, most entrepreneurs do not stop to think about the possible courses of getting funds that are potentially available and take on the first loan that they can get to keep their business alive. Often, it is the assistance you can get from family and friends that can help you to sustain your business in the initial stages without having to approach banks and other financial institutions for loans that can soon become a big problem. If the cash requirement is temporary, accessing credit using your chase freedom credit card or even taking on a short-term personal loan can be easier than traditional bank finance. However, even if you are asking family and friends to help you out to keep your business afloat, you should be clear about how you are going to repay them to avoid putting your relationships under strain.
Defaulting on Repayments
Missing loan repayments on the due dates usually has multiple repercussions and is a red flag that all is not well with your cash management or even the overall financial health of your venture. Apart from getting slapped with steep penalties and fees for missing a payment date, it becomes doubly difficult to catch up with the payment on the next due date. If you happen to miss that payment also, you can be sure that you have embarked on a downward death spiral that can only end in disaster. If you spot cash flow problems, it is better to immediately take stock of the situation, consolidate your debts, and rein in your expenses so that you can repay the debt without further damage to your business reputation and credit score. If need be, take some of your biggest lenders into confidence and ask them to restructure the payment schedule. Doing this well in time before things go out of control is important.
Not Shopping Around for the Best Deal
Loans for small businesses vary a lot in their scope and terms and start-up owners will do well not to jump and accept the first offer that is made to them. If you look around, there is a large variety of funding options from both private and government agencies but each of them has its pros and cons as well as terms and conditions. Getting comparative quotes from as many lenders as possible is a very effective strategy for getting the best deal.
Ignoring the Fine Print
Loan contracts are usually complex documents designed by lenders to protect their interests under all possible circumstances. Borrowers can be forgiven for thinking that they are all standard clauses that do not need to be read or understood, however, the fine print can hide many fees under different names that can easily add an extra 3-5% to the cost of borrowing making a great deal hopelessly expensive. If you need to take a loan, you should read the fine print in detail even if it is lengthy so that you know what is in it and not taken by surprise at a later date.
Regardless of the kind or amount of loan that you think you need to sustain your small business venture, you need to know the state of the company finances thoroughly and how it matches with your business plan. Without having the big picture clear in your mind as well as the details, you can end up making ill-informed financial decisions that can only hurt your business and threaten its survival.