Financing is the lifeblood of any business. But it can be a frustrating and tricky process, especially if you’re not well-versed in finance or don’t have access to the right people to help you out. It’s one of the biggest decisions in the life of your business – should you finance or seek external funding?
To help you make an informed decision, we asked experts what they think. This article will share 8 mistakes businesses make when financing themselves and how they can avoid them. Let’s see what they had to say!
#1 – Not knowing your cashflow
One of our biggest jobs as business owners is to make sure we always have enough cash on hand. Do you know how much money your business makes and spends each month? If not, it might be time to get familiar with your company’s cash flow. A healthy cash flow means you’ll be able to pay expenses when they come due and avoid incurring debt or bouncing checks. It also helps you avoid many other common financing mistakes.
The best way to start getting a handle on your cash flow is by tracking income and expenses for at least two months, preferably four months. There are plenty of resources available—even online tools (hint: Google free small business accounting software)—to help you calculate your cash flow. Just remember that there are many different ways to track revenue and expenses; it’s important to use consistent methodologies across time periods so you can see how much money you make or lose on average each month or quarter.
#2 – Waiting until you need it
Most small businesses will never need financing, so starting a conversation about financing when you do need it is incredibly difficult. The best time to start talking about your financing needs is before you have them. It’s hard to know when you will need capital—you might not even know what your business idea is yet—but setting up relationships with lenders can take months or years, depending on where you are in your business development.
Don’t worry if it takes longer than expected; just get started. Mike Nickerson from Palo Alto Software thinks that thinking of finance as an ongoing process can help alleviate some of these mistakes. Business owners should consider their finances at least once a year and more often if they see something unusual (like large account receivables or customer orders in excess of budget), he says. Nickerson recommends checking revenue against expenses every three months: An entrepreneur should always be asking themselves questions like ‘How much money am I making? How much money am I spending?
#3 – Not having an exit strategy
An exit strategy is exactly what it sounds like—the plan you’ll put into place to get out of a venture that isn’t working. If you have no plans to bail when times get tough, you might end up pouring more and more of your money into something that’s not working instead of cutting your losses. Instead, be honest with yourself about what could go wrong with your business idea and how likely it is to happen. And then develop an exit strategy. Your bank account will thank you for it
#4- Overvaluing personal assets
It may sound counterintuitive, but many business owners find themselves in a position where they can’t get financed because of their personal assets. Banks and traditional lenders can be leery of loaning money to individuals who own luxury items or property that won’t increase in value. An entrepreneur with a net worth in excess of $1 million or an annual income that exceeds $200,000 may not qualify for debt-based financing through a bank.
If you have significant resources (like equity in your home) that you’re using as collateral to finance your startup, remember that these same resources will likely factor into your application—banks will look at your total net worth when determining whether you have sufficient liquidity. If your startup is running low on cash (and you don’t want to take out a loan), there are other ways to raise funds outside of traditional lending institutions.
#5 – Not understanding what is involved
Most new business owners are not prepared for what they need to do when financing their company. Most assume that all they have to do is secure a loan and that it will be quick and easy. Many don’t understand what type of debt or equity needs to be involved, who needs to sign off on documents, or how long it takes from start to finish.
If you are not familiar with all aspects of securing funding for your business, you could lose out on potential investors because of mistakes made during financial negotiations. The last thing you want to happen is to appear unprofessional during meetings or discussions about funding by not knowing enough about debt and equity.
Contact any expert financial services offering company in the UK like Finance Hub before starting these conversations so you can learn more about how everything works before pursuing outside capital. Also, ask them if there are any mistakes many companies make that can cause problems in getting finances secured by learning from their experiences as professionals in assisting others with finances.
#6 – Trying to do everything yourself
It’s often tempting to try and handle everything yourself—mainly because you don’t want to waste time explaining things more than once, or you simply don’t have time. But delegating is an important part of being a successful business owner. It frees up your own time, as well as helps increase employee loyalty.
Asking for help isn’t always easy, but it will pay off in spades. Trust us on that one! Take a cue from others: If you see someone doing something better than you are—and they say they were happy to share how they did it with you—then accept their generosity and move on with confidence that it will work out for both of you in time!
#7 – Worrying about failure
The single biggest mistake we see entrepreneurs make is they worry too much about failure. You don’t want to fail, but you know what? If you never take a risk, how can you ever succeed? Don’t let fear of failure keep you from taking chances—you will be better off in the long run. Plus, your failures are temporary setbacks; if you learn from them and move on quickly, you’ll continue to succeed.
Many people who fail at one business go on to great success with another idea or company. Others use their past mistakes as motivation for future triumphs: I have failed over and over again, but I am not discouraged because each time I have learned how to succeed. – Michael Jordan
#8 – Trying for the wrong financing option
Entrepreneurs often overlook, or ignore, alternative financing options that might be a better fit for their business. Depending on your industry and credit score, you may find more success in securing private loans. While these aren’t typically as easy to get or as affordable as SBA loans, entrepreneurs may have better luck convincing banks and angel investors to fund their ideas than they would be convincing an SBA lender.
But before going down that road, take some time to consider if getting a loan makes sense for your company. You should also make sure you fully understand any program requirements; most of them come with rules about how long it will take to receive funding (anywhere from 30 days up to five years), fees associated with receiving and paying back money and under what circumstances you can leave and reapply.
Financing is a critical part of running any business. When it comes to your financial situation, make sure you’re prepared for the future and don’t take on more debt than you can handle. We’ve outlined 8 mistakes that businesses make when financing their operations and we hope this article helps you avoid them in the future!
If you don’t have any experience with financing or lending, don’t worry! Finance Hub can help with all of this. Please let us know in the comments below if you have any questions about our services or would like to find out more information about our loan products!