Jumping into the world of running a small business can come with great rewards. However, many small business owners need some form of financing in order to successfully launch their operations – be it a loan from a bank, some extra cash from friends and family members, or alternative lending in the form of commercial financing. Experienced small business owners will tell you that there are some key mistakes that many new entrepreneurs should avoid:
When seeking financing for your small business, one of fastest ways to receive a rejection letter is to not have a plan. Small business financiers advise that entrepreneurs make a very detailed business plan. Not only do lenders find this appealing because it shows why the business needs financing and where money is going to be allocated, but it also gives a time table of projected revenue and profits.
Failure To Read The Fine Print
The devil is in the details, and when seeking out financing for a small business, many entrepreneurs are focused on the amount of working capital they need, without paying attention to the fine print in the loan agreement. Most loans come with interest rates, payment windows, contingency charges for late payments, and additional fees if a loan is paid off well ahead of schedule. Little details like those mentioned can cause a lot of financial trouble down the road, if business owners do not take the time to read the fine print when securing financing for their small business.
Solely Using Credit Cards To Finance A Small Business
For many new small business owners, it can be difficult to get financing through traditional bank loans. Rather than seek alternative financing options, entrepreneurs will rely on personal and business credit cards to fund their small businesses. This is extremely dangerous, especially if the business is new, or if the volume of sales is not bringing in enough money to exceed the expenditures. Falling behind on payments can place a small business owner’s credit score in jeopardy, as well as the financial standing of the company. This is very prohibitive in securing any future financing, and vendors are very likely to make credit rating checks before they deal with small businesses.
Lack Of Negotiations
Banks and private lenders alike rarely offer financing terms that are carved in stone. While small business owners may be tempted to take the first decent proposal that comes along, they should keep in mind that most initial financing offers are designed to make the most profit from the business owner, but those terms can be negotiated into something that is more favorable. There are many lending groups that will structure financing around what a small business needs, with terms and pricing that are amenable to all parties involved. Entrepreneurs need to remember that they are in control, and just because someone is offering you financing does not mean you are obligated to accept it.
Mixing Business And Personal Finances
Many small business owners draw from personal finances to fund their companies. While this money is readily available, using personal funds can hurt entrepreneurs on many fronts. By using personal funds for a small business, entrepreneurs are preventing the company’s credit rating from growing and improving. Considering business loan limits can be for amounts much greater than personal loans, it is wise to avoid using personal funds. Also, if a small business owner is using personal funds for the company, and there is a cash flow problem, then both business and personal finances are negatively impacted, resulting in the inability to pay off credit card debt, make mortgage payments, or anything else that keeps a household running.
Small business owners need to keep in mind that there are many options available to finance a new or growing company. By researching both conventional and alternative financing, entrepreneurs can easily find the financing they need, on the terms they want, in order to secure working capital for their small businesses.