Every year, more than 627,000 small businesses get started in the United States. Though many of those companies are entirely self-funded, many others rely on financing to get their companies off the ground.
Taking out loans and finding other ways to finance your business is a smart way to avoid putting too much strain on your personal finances. However, it’s not without risk.
Many people end up making business financing mistakes that end up wrecking their budget or keeping their business from reaching its full potential. Here are a few of the most common mistakes business owners make and what you need to do to avoid making them yourself.
- Not Providing Enough Documentation
When you’re applying for all types of loans, lenders will expect you to provide adequate documentation about your business’s finances, your profits, and your plan to pay the loan back. Before you even start the application process, you should have all of those documents gathered together.
If you don’t, the application process will take longer and lenders won’t be able to give you a decision in a timely manner. Worse, you could end up having your application denied for failing to provide enough documentation upfront.
If you’re not sure where to start, speak with your bookkeeper or accountant. They’ll be able to compile the information your lenders need quickly.
Keep in mind that you may also need to provide personal financial statements for each application. This helps lenders get a better idea of your entire financial situation. Be sure to include all sources of income to make your application even more attractive.
- Forgetting to Review Your Business Plan
According to the team at Loanpal, the most successful business loan applications include a detailed business plan. Think of this plan as an outline for how your business operates, how you’ll use the money you borrow, and how you’ll pay it back on time.
If you’ve gotten your company off the ground, you should already have one drawn up. That doesn’t mean you should submit it as-is. Instead, you’ll need to review it and optimize it for your prospective lenders.
Make sure to include your plans for the loan, how much you need to borrow, and what you’ll do to make payments each month. If you don’t include this information, lenders won’t feel confident working with you and may decide to deny your application outright.
- Waiting Too Long to Apply
Timing matters a lot when you’re applying for loans and can mean the difference between sustainable growth or shuttering your doors. Many business owners end up waiting until they already need the money before they submit their applications.
This might not seem like a huge deal, but some lenders can take as long as six months to decide whether they want to lend you money in the first place. If you wait until you need the money, you could end up running out before you even get a decision from lenders. Instead, apply as soon as you start considering your options.
This way, you’ll get the money before your cash flow is too tight and can avoid putting strain on your already tight budget.
- Not Shopping Around With Lenders
One of the biggest small business financing mistakes business owners make is working with the first lender that approves their application. As tempting as this might seem, you could end up with unfair loan terms if you’re not careful.
Remember, different lenders will view your loan application in different ways. Some may see your business as a risky borrower. Others may view your application as low-risk and feel confident lending you the full amount you’re asking for at low-interest rates and fair repayment terms.
The only way to know how lenders will view your application and make sure you’re getting the best deal possible is to apply with different banks.
Try to get quotes from at least three credit unions, banks, or private lenders and compare the terms they offer you. Look at both the principal amount (what they’ll loan you) and the interest rate they’ll charge on what you borrow.
As a general rule, you’ll want to choose the lender that offers you the most money at the lowest interest rate.
- Thinking Traditional Loans Are the Only Option
Though traditional bank-issued loans are the most common way businesses get money, they’re not the only option you have at your disposal.
Don’t hesitate to look into different types of loans and financing options if lenders keep denying your applications. For example, you could partner with an investor who believes in your business and receives a set percentage of your profits. You could crowdsource and turn to the general public that already loves your brand for help.
There are dozens of loan alternatives out there. You just need to be creative and think about other ways to get money.
- Focusing Only on the Principal
When you borrow money, it’s easy to focus on the final dollar amount that the lender offers you. After all, as long as you pay it back in full and can make the minimum payments every month, you’re in good shape, right?
Unfortunately, it’s not that simple. You need to look at the entire loan agreement before you make a decision.
Make sure you’re comfortable paying the full monthly premium amount plus any fees and interest accrued on the loan by using a small business loan calculator. If you think the payments are too high or the terms are unfair as a whole, you’ll want to keep looking for a different loan. Otherwise, you risk putting your business in a tight financial spot.
- Draining Your Personal Savings
It’s normal for business owners to invest their personal savings into their companies, especially in the beginning. It keeps them from having to borrow large amounts of money and gives them a stronger sense of ownership.
However, you should never use so much of your personal savings that you end up draining them completely. You still have personal expenses to cover and unexpected costs that will come up.
The last thing you want to do is take out a personal loan to cover those expenses because you blew through your savings quickly.
Use your savings cautiously and leave enough to help you stay afloat if your business gets tight. Remember, it’s okay to put yourself first.
- Borrowing Too Much Money
When you apply for a loan, you should have a general idea of how much you need to borrow ahead of time. Though there’s no guarantee that lenders will offer you that amount, there’s also a chance that they’ll qualify you for a larger loan.
Just because you’re approved for that higher loan principal doesn’t mean you have to borrow that amount. Instead, borrow only what you need.
The more money you borrow, the more you’ll pay each month. The higher your payments are, the less money you’ll have on hand to invest in your company.
By only borrowing what you’ll need, you’ll find it much easier to stick to your budget and keep your business profitable at all times.
- Not Borrowing Enough
Though keeping your monthly payments as low as possible should be a priority, you still need to borrow enough money to accomplish your goals. Borrowing too little will keep your debts low and give you smaller monthly payments at a cost.
Every time you apply for a new loan, the lender will perform a credit check both on your business and your personal credit history. Each credit check will cause your score to drop at least a little. Further, the more loans you have, even if they’re small, the harder it will be to qualify for a new loan.
The best thing you can do for your business is to borrow enough money to accomplish your project. This will help you maintain a high credit score and ensures that more banks will be willing to work with you in the future.
- Forgetting About the Fees
Once you find a loan that works for your company’s needs, it’s tempting to accept it and get started making improvements. You need to take the time to read the loan agreement in full before you make a decision.
Many lenders charge hidden fees on their loans and those fees can change how much you end up paying them over the life of the loan and each month.
Once you get your quote, read through the agreement in detail. If you have questions, call the lender and get them answered before you accept the money.
This will keep you from making a bad investment in your business’s future every time.
Avoid These Business Financing Mistakes
When you’re trying to grow your business, securing great financing is the best way to bring your dreams to life. Familiarize yourself with these business financing mistakes before you start applying for loans or looking for investors.
This way, you’ll be able to avoid making the most common mistakes and can instead focus on using the money to improve your company’s operation.
Looking for more tips and tricks to help you grow your business the right way? Check out our latest posts.
