8 Common Business Financing Mistakes and How to Avoid Them

Published June 6th, 2022 by River Point Capital

Did you know that most small businesses fail because they run out of cash or find it challenging to raise new capital? While some may choose to run their business using personal finances, others rely on debt funding to run their operation.

There's no doubt that applying for loans is a great way to guarantee that you don't strain your finances. But, this comes with its fair share of challenges. You could make business financing mistakes that may hinder you from attaining your full potential.

Want to seek funding to grow your small business? Well, check out the common mistakes you should avoid.

1. Not Seek Guidance From a Financial Professional

Being a business owner doesn't mean that you're responsible for making all the decisions. Some decisions require the input of a financial professional. This is especially the case if you're trying to raise capital to improve your business operation.

Before you can borrow money, ensure that you seek advice from financial experts on the proper steps to give you the results you want. What may seem ideal, in your opinion, may sometimes not be acknowledged by experts.

The main problem with seeking finances without satisfactory legal help is that you could lose your funding soon after starting your business.

2. Failing To Secure the Right Type of Funding

There are many sources of business funding, and they all may be a great option based on your financial needs. So, when securing your finance, ensure that you use the credit product for the right purpose.

It's okay to secure a loan when purchasing new machinery or land if you're expanding your business. But, using such type of finance for paying salaries is a huge mistake.

When you invest in an asset, it acts as collateral. So, when you fail to generate enough money to meet your payment deadline, you can sell it and offset the loan.

3. Not Having Collateral

If you're looking to seek a huge business loan, your lender may require you to have collateral. These are assets such as equipment or vehicles used as security when securing loans. For lenders, collateral acts as a safety net if you default on your loan.

You should also know that securing a loan with collateral is cheaper than unsecured options. Regardless, when searching for a business loan, it's best to look for collateral-free options before seeking secured loans.

4. Having an Improperly Designed Business Plan

When applying for your loan, most lenders want to understand the vision of your business. Usually, this information is detailed in a business plan. Your plan also indicates how you plan to expand your business in the coming years and the business financing strategy you'll use to succeed.

The main concern with a poorly drafted business plan is that it lowers a lender's confidence level. It gives the impression that you don't have the vision to take your business to greater levels. So, they'll skip your application and move on to other prospects.

5. Not Being Clear on How You Plan To Use the Funds

When applying for a loan, provide reasons on how you plan to use it. This helps your business loan provider know that you're not going to misuse the funding. For instance, if you state that you'll use your loan to improve production, the lender can quickly approve your application.

Remember that financial institutions want to see that the money they're offering is utilized to improve the operations of a business. So, when the lender sees your business needs, they'll gauge whether the funding is sufficient to enhance your business.

For faster approval of your business funding, make sure that you clearly outline the key benefits you'll get after receiving the loan.

6. Interpreting the Financial Details Incorrectly

When securing a loan for your business, some lenders will begin by checking the number of years you have been in operation. They may also ask to see your balance sheet before processing your loan. One of the mistakes that SMEs make is that they don't correctly interpret their financial statement.

You may think that inflating your income and reducing expenses helps your business appear profitable. However, this can lead to the rejection of your loan. When submitting any financial records to your lender, fill in the correct details of your expenses, liabilities, assets, etc.

When asked to provide your business financing documentation, ensure that the balance sheet and cash flow statements you provide are up to date.

7. Waiting for Too Long Before Making Your Application

Timing plays a crucial role when applying for business loans as it determines the growth and closure of your business. Some business owners wait for a long time before they make their application.

While this may not seem like a huge deal, waiting for longer than usual can make you run out of business before your lender provides any feedback. It's always advisable to complete your application when you start to consider your options.

This will ensure that you will receive your money before your cash is tight, putting a lot of strain on your budget.

8. Offering a Lot of Control Stake

There will come a time when business owners will sometimes give operational control of their business. This is the case if you're looking to scale up or want to increase your capital through private equity.

Doing this isn't a mistake. However, be careful about what you plan to exchange for your equity. One of the ways to make sure you don't give a lot of control over your business is to avoid debt financing.

If you plan to take the private equity route, you should work with advisors who'll help you negotiate the terms that will ensure you don't lose control.

Learn the Business Financing Mistakes To Avoid

Many start-up businesses rely on debt financing to help them grow their business. This is a great way to seek capital as it offers you control over the ownership of your business.

But, you should know that such kind of financing comes it its share of challenges. You can make many business financing mistakes during this process that can have negative consequences.

Are you running a start-up business and looking to improve your financial position? Contact us today to help improve your operation with business financing.

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