Avoiding the top 6 business financing mistakes is a key element to business survival.
If you start making these business financing mistakes too often, you will greatly reduce your chances for long-term business success.
The key is to understand the causes and importance of each so you are able to make better decisions.
Errors in business financing (1) – No monthly accounting.
Regardless of the size of your business, inaccurate records of all kinds create problems related to cash flow, planning and business decisions.
While everything has a cost, accounting services are extremely cheap compared to most other costs a business incurs.
Once an accounting process is established, costs typically decrease or become less expensive because no unnecessary effort is required to record all business activity.
This one mistake usually leads to all the others one way or another and should be avoided at all costs.
Business financing mistake (2) – No projected cash flow.
No sensible accounting leads to you not knowing where you have gone. No planned cash flow leads to not knowing where you are going.
Without keeping score, businesses tend to drift further and further away from their goals, waiting for a crisis to force a change in monthly spending habits.
Even if you have projected cash flow, it must be realistic.
Some degree of conservatism must be present or it becomes meaningless in a very short period of time.
Business financing mistakes (3) – insufficient working capital.
If you don’t have enough working capital to run the business properly, no record will help you.
This is why it is important to create a cash flow forecast u before you start, acquire or expand a business.
Too often, the working capital component is completely ignored, with the primary focus on capital investments.
In this case, the cash flow crisis is usually felt quickly because there are not enough funds to properly manage the normal sales cycle.
Business funding mistakes (4) – managing payment weaknesses.
If you don’t have meaningful working capital, forecasting and accounting, you will likely have cash management issues.
The result is the need to extend and defer payments as they come due.
This may be the extreme edge of the slippery slope.
I mean, if you don’t figure out what’s causing the cash flow problem in the first place, extended payments can only help you dig a deeper hole.
The main targets are government remittances, accounts payable and credit card payments.
Business funding mistakes (5) – Poor credit management
There can be serious lending consequences when payments are deferred for both short periods and indefinite periods of time.
First, late payment on credit cards is probably the most common way that both businesses and individuals destroy their credit.
Second, tax exams are also covered in business credit reports and are not another form of black marking.
Third, if you delay a payment too long, a creditor may file a judgment against you, further damaging your credit.
Fourth, if you apply for credit toward future loans, falling behind on government payments can lead to an automatic default by many lenders.
It gets worse.
Every time you apply for credit, credit inquiries are listed on your credit report.
This can cause two additional problems.
First, multiple inquiries can lower your overall credit score or score.
Second, lenders tend to give less credit to a company that has a lot of inquiries on its credit report.
If you run into situations where you don’t have cash for a limited period of time, you should proactively discuss the situation with your creditors and negotiate repayment arrangements that you can live with and that don’t jeopardize your credit.
Business funding mistakes (6) – No proven return on investment.
For start ups, the most important thing from a financial perspective is to be profitable as soon as possible.
Most lenders must have at least one year of profitable closings before considering loan funds based on the strength of the business.
Before short-term profitability becomes, business financing is essentially based on personal loans and net worth.
For existing businesses, historical results must show profitability to acquire additional capital.
The valuation of this payback capability is based on the net income recorded for the business.