Avoid These Business Financing Mistakes

With small-to-medium size businesses (SMBs) struggling to reduce operating costs and plan for unforeseen expenses, American entrepreneurs—including countless home service business owners—are already starting off at a disadvantage. According to the American Dream Gap Report, roughly 20% of SMBs have considered closing their doors. That’s a huge chunk of our economy. Why is this happening? Well, the two leading factors come down to lack of growth and cash flow problems.

On top of that, many SMBs aren’t able to secure the funding required to run their enterprise. Business owners’ dreams of expansion are stifled by the lack of access to affordable capital.

• 45% of small business owners who are denied financing get turned down more than once and 23% don’t know why their applications were denied.

• 23% of small business owners don't know why they were denied

• 26% avoided hiring and expansion because they're frustrated with trying to access funds

The myriad of SMB financing options can feel like a maze at best. Whether you’re starting a business, scaling one, or even just trying to sustain it, your ability to fund the endeavor will make or break your success.

Instead of feeling discouraged, empower yourself by becoming well-informed of your options and avoid these six common mistakes when trying to raise capital:

1. Don’t deplete your personal assets.

Savings accounts, mortgage equity, and 401(k)s can be tempting wells to tap into. But when personal resources are drained too low, it can spell out danger for you and your family. Even though it's important for lenders to see that you are willing to “put some skin in the game”, don’t let it bleed you dry. Define a clear line between personal and business dollars, so your risk is appropriately calculated.

2. Don't forget to have a plan.

Will you use the money for inventory? Payroll? Expansion? Be sure to have a business plan in place so that you have an understanding of how much you really need to borrow. Identify your operating and/or expansion costs, then add a little $$$ cushion... because they always cost more than you think. Without a plan, you could end up under or overfunded, and both have their own set of ramifications.

3. Don’t max out your credit cards.

While it can be tempting to earn those airline miles, credit card rates can skyrocket after the introductory rates expire, leaving you with significant debt. Don’t spend more on your credit card than what you know you can comfortably pay off in-full at your next billing cycle. This will help you avoid a growing stockpile of debt that feeds off of exorbitant APRs.

4. Don’t risk your personal relationships.

 The financial generosity or backing of friends and family should not be your go-to funding source, as tempting and unabiding as it may seem. But if your loan does come from family or friends, don’t forget to legally document and schedule payments to formalize your partnership, so you can avoid any awkwardness or disappointment. Define the type of funding they are contributing. Is it a donation? A long-term investment? Personal loan? Make it clear because there’s a big difference.

5. Don’t ignore your credit score.

 Did you know you have two credits scores? There’s your personal credit score, and then there’s your business credit score. And a lender may check both as part of the funding application—depending on what stage your business is in. This establishes your trustworthiness and gives the lender some insight into how much of a risk you represent to them. 82% of SMBs don’t know how to interpret their business credit score, which directly interferes with their ability to grow or scale. So make sure you take the time to understand your credit report and ensure its accuracy.

6. Don’t wait for surprises.

 The amount of capital you need to run your business every month is referred to as your “net burn rate.” Review your monthly cash flow report for a historical and seasonal perspective. This will show your business’ sales and expenditures over time. Make sure you use a discerning eye when reviewing money-in, money-out, so you don’t get blindsided by miscellaneous operating expenses. Otherwise, you may find yourself “in the red” by the time you discover your company needs more capital.