Avoiding the top 7 business financing mistakes is an essential part in business survival.
If you start committing these business financing mistakes too often, you will greatly reduce any opportunity you have for longer-term business success.
The key is to comprehend the causes and significance of each so that you remain in a position to make better decisions.
>> > Business Financing Mistakes (1) – No Regular Monthly Bookkeeping
No matter the size of your business, inaccurate record keeping produces all sorts of issues connecting to cash flow, preparation, and business decision making.
While everything has a cost, bookkeeping services are dirt inexpensive compared to most other expenses a business will incur.
And when an accounting process gets developed, the cost usually goes down or becomes more cost-effective as there is no squandered effort in recording all the business activity.
By itself, this one mistake tends to lead to all the others in one method or another and must be prevented at all expenses.
>> > Business Financing Mistakes (2) – No Projected Cash Flow.
No significant bookkeeping produces an absence of understanding where you have actually been. No predicted cash flow produces an absence of understanding where you’re going.
Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that requires a modification in month-to-month spending habits.
Even if you have a forecasted cash flow, it needs to be reasonable.
A particular level of conservatism needs to be present, or it will end up being useless in very short order.
>> > Business Financing Mistakes (3) – Inadequate Working Capital
No quantity of record-keeping will assist you if you don’t have enough working capital to run the business effectively.
That’s why it is very important to properly create a capital forecast before you even start up, obtain, or broaden a business.
Too often, the working capital part is completely neglected with the main focus going towards capital property investments.
When this happens, the cash flow crunch is usually felt quickly as there is inadequate funds to handle through the regular sales cycle effectively.
>> > Business Financing Mistakes (4) – Poor Payment Management
Unless you have significant working capital, forecasting, and bookkeeping in place, you’re most likely going to have money management problems.
The outcome is the need to extend and delay payments that have come due.
This can be the very edge of the slippery slope.
I mean, if you don’t discover what’s causing the cash flow problem in the very first place, extending payments may only assist you dig a much deeper hole.
The main targets are federal government remittances, trade payables, and charge card payments.
>> > Business Financing Mistakes (5) – Poor Credit Management.
There can be extreme credit effects to deferring payments for both short periods of time and indefinite periods of time.
First, late payments of credit cards are probably the most common methods which both businesses and individuals ruin their credit.
Second, NSF checks are also recorded through business credit reports and are another form of black mark.
Third, if you put off a payment too long, a financial institution could file a judgment against you further damaging your credit.
4th, when you apply for future credit, being behind with federal government payments can result in an automatic turndown by numerous lenders.
It becomes worse.
Each time you apply for credit, credit inquiries are listed on your credit report.
This can cause two extra problems.
First, several inquiries can reduce your overall credit score or score.
Second, lenders tend to be less going to give credit to a business that has a multitude of inquiries on their credit report.
If you do enter into circumstances where you’re short money for a limited time period, ensure you proactively go over the circumstance with your financial institutions and work out repayment arrangements that you can both live with, and that will not threaten your credit.
>> > Business Financing Mistakes (6) – No Recorded Success
For start-ups, the most essential thing you can do from a financing viewpoint is getting rewarding as quick as possible.
Most lenders need to see a minimum of one year of rewarding monetary statements before they will consider lending funds based on the strength of the business.
Before short-term profitability is demonstrated, business financing is based mainly on individual credit and net worth.
For existing businesses, historical outcomes need to show profitability to obtain extra capital.
The measurement of this capability to repay is based on the earnings recorded for the business by a 3rd party recognized accounting professional.
In most cases, businesses deal with their accountants to reduce business tax as much as possible but also ruin or restrict their capability to obtain at the same time when the net business earnings is inadequate to service any extra financial obligation.
>> > Business Financing Mistakes (7) – No Financing Strategy
A proper financing strategy produces 1) the financing required to support today and future cash flows of the business, 2) the financial obligation repayment schedule that the cash flow can service, and 3) the contingency funding needed to resolve unplanned or distinct business needs.
This sounds excellent in principle but does not tend to be well-practiced.
Because financing is mainly an unplanned and after the reality event.
It appears when everything else is found out, then a business will try to find financing.
There are numerous reasons for this including entrepreneurs are more marketing oriented, people think financing is easy to secure when they need it, the short-term effect of delaying monetary issues are not as instant as other things, and so on.
No matter the reason, the absence of a practical financing strategy is indeed a mistake.
Nevertheless, a meaningful financing strategy is not most likely to exist if one or more of the other 6 mistakes are present.
This strengthens the point that all mistakes listed are intertwined and when more than one is made, the result of the unfavorable outcome can end up being compounded.