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No small business can thrive without dependable financing. But even after you secure a good financial deal, you need a plan in place to maintain a solid rapport.
You’re not ‘home free’ simply because you’ve got access to the capital you need. Check out these 7 financing mistakes to avoid both before and after you get the money you need for your small business.
1. Signing the First Contract
Finding someone willing to invest in your dreams is exciting. This thrill might prompt you to jump on the first financing offer you receive.
While there’s no rule that says the first investment or loan offer you get is a bad deal, there is a rule about reading a contract before signing. Reading the contract helps you understand what you’re getting yourself into and how much it’ll cost.
But if you’re the owner of a startup business, you probably know enough to be dangerous.
You have zero experience getting financing for small businesses. The contract you’re reading has no actual relevance until you have something else to compare it to.
Get multiple bids and compare the financing terms to know whether you’ve got a good deal or not. It could be the opportunity of a lifetime or a debt trap that’ll keep you tethered for decades.
Shop around before signing a contract and you’ll become a savvy borrower ready to take control of any financing you receive.
2. Easy Come, Easy Go
Some of the best things in life are free. But this couldn’t be farther from the truth when it comes to financing.
The easiest deals you find aren’t going to be the best options. You’ll get solicitations in the mail or maybe even calls over the phone offering instant access to capital.
Avoid any financing offers you haven’t put in the work to find. The best deals in business are the ones that meet your financial goals.
There’s little chance of these deals falling into your lap unless you’ve got an impeccable personal network. Having friends at a venture capital firm could very well get your tech startup financed at lightning speed.
Skip any deals that are being ‘sold’ to you by unknown companies.
3. Paperwork Intimidation
One of the most common reasons people don’t pursue government financing is paperwork. The federal and state government needs a certain amount of documentation before offering loans.
A government grant or loan application might be twice as much paperwork your local bank. Don’t be intimidated by paperwork.
The federal government offers more grants for business owners than any other organization. It’ll take some digging to find the right deal, but once you do you have access to money without any strings attached.
You won’t have to worry about the possibility of a scam or the organization going out of business limiting your future opportunities. Consider hiring a grant writer if you don’t have the time to compile packets of paperwork.
4. Not Getting Affairs in Order
Your personal credit might be amazing, but this doesn’t mean you don’t need to build business credit for future financing. Avoid relying too much on your personal financial history when starting a business.
Many organizations will require personal credit information until your business has its own profile. Start your business credit profile by opening an account with Dun & Bradstreet.
You’ll be assigned a free DUNS number upon signing up. This number is used by lenders to determine your creditworthiness.
It’s also needed to apply for government contracts and register your business with SAM, or System for Award Management. Large corporations require these affiliations before they award big contracts to your business.
5. Wrong Entity
Meet with an attorney before pursuing financing to avoid setting up the wrong type of business entity. There are business entities that can hurt your chances of raising money down the road.
For example, tech companies that operate as an LLC have a hard time convincing investors to come on board. Tech companies are encouraged to set up a C corporation since it gives investors more control over the business.
For other business types, an S or C corporation is overkill. Consult with an experienced business attorney to find an entity that makes sense for your exit strategy just as you would with investing vs. trading.
6. It’s Not Your Money
One of the more common financing mistakes business owners make is treating their loan as their own money. You might’ve slipped up and paid your car note from your business account in the past, but you can’t make these careless errors with other people’s money.
This is especially true when you have government financing. Many lenders reserve the right to audit your books at any time.
If you’re caught misusing funds for personal reasons, your funding might be cut. In an extreme situation, you might be blacklisted from getting any future financing.
7. Underfunding
It might seem counterintuitive, but avoid accepting loans for too little money. It might seem like a safe bet to only borrow a small portion of your budget.
This is a great way to cut back on debt so your business can keep more of its profits, right? Wrong.
Borrowing too little money sets your business up for failure. You aren’t able to cover operating costs which sabotages your ability to profit.
You have a financing goal for a reason. Don’t launch your business until you’ve met your financing goals for the first two years.
Financing Mistakes for Businesses
Financing mistakes for businesses are usually innocent. Most business startups launch with the best intentions of promptly repaying their debt in full.
But life gets in the way and things like bad loan terms or falling short on your monthly income slowly set you back. Avoid the drama of being underfunded or getting a bad deal by taking your time when shopping to find the best financing for your business.
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