7 Critical Business Financing Mistakes

Avoiding the top 7 business financing mistakes is a key component in business survival.

If you start committing these business financing mistakes too often, you will greatly reduce any chance you have for longer term business success.

The key is to understand the causes and significance of each so that you’re in a position to make better decisions.

>>> Business Financing Mistakes (1) – No Monthly Bookkeeping.

Regardless of the size of your business, inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and business decision making.

While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.

And once a bookkeeping process gets established, the cost usually goes down or becomes more cost effective as there is no wasted effort in recording all the business activity.

By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.

>>> Business Financing Mistakes (2) – No Projected Cash Flow.

No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.

Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that forces a change in monthly spending habits.

Even if you have a projected cash flow, it needs to be realistic.

A certain level of conservatism needs to be present, or it will become meaningless in very short order.

>>> Business Financing Mistakes (3) – Inadequate Working Capital

No amount of record keeping will help you if you don’t have enough working capital to properly operate the business.

That’s why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a business.

Too often the working capital component is completely ignored with the primary focus going towards capital asset investments.

When this happens, the cash flow crunch is usually felt quickly as there is insufficient funds to properly manage through the normal sales cycle.

>>> Business Financing Mistakes (4) – Poor Payment Management.

Unless you have meaningful working capital, forecasting, and bookkeeping in place, you’re likely going to have cash management problems.

The result is the need to stretch out and defer payments that have come due.

This can be the very edge of the slippery slope.

I mean, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.

The primary targets are government remittances, trade payables, and credit card payments.

>>> Business Financing Mistakes (5) – Poor Credit Management

There can be severe credit consequences 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 ways in which both businesses and individuals destroy 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 creditor could file a judgement against you further damaging your credit.

Fourth, when you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders.

It gets worse.

Each time you apply for credit, credit inquiries are listed on your credit report.

This can cause two additional problems.

First, multiple inquiries can reduce you overall credit rating or score.

Second, lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.

If you do get into situations where you’re short cash for a finite period of time, make sure you proactively discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won’t jeopardize your credit.

>>> Business Financing Mistakes (6) – No Recorded Profitability

For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.

Most lenders must see at least one year of profitable financial statements before they will consider lending funds based on the strength of the business.

Before short term profitability is demonstrated, business financing is based primary on personal credit and net worth.

For existing businesses, historical results need to show profitability to acquire additional capital.

The measurement of this ability to repay is based on the net income recorded for the business by a third party accredited accountant.

In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow in the process when the business net income is insufficient to service any additional debt.

>>> Business Financing Mistakes (7) – No Financing Strategy

A proper financing strategy creates 1) the financing required to support the present and future cash flows of the business, 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique business needs.

This sounds good in principle, but does not tend to be well practiced.

Why?

Because financing is largely an unplanned and after the fact event.

It seems once everything else is figured out, then a business will try to locate financing.

There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.

Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.

However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.

This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.

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The Primary Cause Of Business Financing Frustration

Finding proper business financing is not easy at the best of times for most small and medium sized business owners and managers.

There are a number of reasons that collectively explain why the business financing market can be so difficult to understand and navigate.

But probably the single biggest reason is the lack of useful information about how the business financing market actually works.

Business financing information and education sources predominantly come in two forms: 1) Text books; 2) Major bank advertising.

If you’ve ever read through a educational finance text book or taken a business financing course, you already know how difficult it can be to apply the theories, principles, and strategies to a small or medium sized business.

Our formal education system provides limited information as to how the market place works, how to plan for financing requirements, how to manage periods of growth, decline, transition, start up, etc.

Sure academic books and courses can go through all these areas in great detail, but is the information practical, real world, something you can relate to and apply yourself as a manager or owner of a small or medium sized business?

In most cases, the answer is a resounding NO.

Most finance text books speak to big business financing dynamics that are not easily transferable to small and medium sized business scenarios.

Outside of the formal education system, the next great source of business financing information is the information provided by the major banks, which they tend to make available to you by the boat load through their broad based marketing campaigns.

Unfortunately, the information by itself seldom helps you determine if a particular institution would be able to provide you with financing, or what would be required to qualify for a loan.

The good news is that business financing sources continue to grow in numbers as more and more lenders carve out a particular piece of the market to service.

In order to take advantage of these alternatives, you need to have a solid approach in place when seeking business financing.

Here’s a short list of things to consider

>>> Develop a solid, ongoing, understanding of both your personal and business assets, income, and cash flow.

Regardless of the business financing model, these elements will always come into play to some degree.

Being able to demonstrate a solid understanding of your business financials is also an indication of your ability to manage the underlying business.

>>> Monitor and manage your personal and business credit.

Small and medium sized business financing is focused on both personal and business credit histories.

Regular reviews of both personal and business credit reports from the major credit reporting agencies are important to avoid errors and credit practices that can severely damage your borrowing power.

>>> Develop your marketing position.

Yes, seeking business financing is a marketing exercise.

When applying for business financing, you’re marketing your business to lending sources and they in turn are marketing their business financing programs to you.

Think of the lender as a customer to better understand what they’re looking for. Then, develop a business proposal that addresses all their potential needs and concerns.

>>> Research Lending Sources

There are lots of business financing sources. But there is also lots of variation in the types of business applications each one is prepared to consider.

Broad based lenders rely on credit history and net worth. As you get more specific in terms of financing application and industry, lender programs become more narrow and can be harder to locate.

You need to consider things like industry, sector, and geography when looking for business financing sources.

Financing consultants and business loan brokers can be an excellent source of information to aid you in this process.

>>> Qualify The Lender

Before you make a formal application, find out if the lender has the programs and lending track record to meet your specific needs.

Too often, the lender is doing all the qualifying.

>>> Compare your options

Depending on the scenario, there can be several financing strategies that could work for your business.

Make sure you take the time to compare before making a decision. The extra time spent could save you considerable time and money in the long run.

>>> Start Today

Regardless of what your business financing needs are right now, you should regularly invest time staying on top of your business financials, monitoring your credit, and researching financing sources that fit your industry and potential future requirements.

When the time comes to acquire capital, your proactive efforts can make all the difference in getting the capital you need with terms and timing that are acceptable to your business.

Getting A Business Financing Loan

Business financing loans are a line of credit which help people who are in business. There are different kinds of business financing loans that are offered to different lenders either to raise funds or loan capital to your business in order to expand your company.

Although there are many ways also to finance your business and one should have sufficient cash flow within the existing business you have so that the lender will be able to finance the growth of your company by its own means or you can turn to a bank or other financial institutions that can provide different variety of loans.

Having a business financing loan is not as easy since they have some criteria or financing programs where in you meet the following criteria such as:

Your business must have commercial customers
Your business must be established and must have consumers or customers.
They don’t finance on real estate projects

Some of the business financing programs:

Business are available of every size
Easy to obtain
Have many advantages over conventional business loans
Can be set up in a few days

There are some business financial loans that don’t require you to have a good personal credit or showing countless financial statements since their financing program or loan allows being flexible to help your business grow but before looking for a business financing loan, you need to know how business loans work and used.

You can see that there are many sources of financing loans that are geared to types of businesses but the sources have certain criteria for investment and loan but that depend to the area which they participate.

These are some of the areas of Business Financing Loan:

Commercial Property
Start-up Financing for business
Loans for Government
Purchase Order Advances
Leasing Equipment
Commercial Financing
Invoice Factoring
Asset Sales Leaseback
Investment Banking
Angel Investor s which is known as informal investor
Venture Capital known as Private Equity Capital

But private money business financing loan is different since it includes equity loan, hard money as well as private money loans. They limit only to small business investment companies, private investors, business angels, ventures capital firms and commercial lenders.

The loans have two types for you to choose when in regards of terms in payment. There is the short term and as well as long term which suits your budget and you will notice also that there are lots of commercial lenders, business loan brokers and business financing companies had gone out of business due to global crisis and many people were having loans anywhere and everywhere in order to survive.

If you need financing for your business, you need to plan and study hard of it since financial institutions requires business plan that includes detailed start up cost, marketing plans, monthly expenses, projected profit, etc. Remember that having a business one should do hard work, passion, and determination and have dedicated workers who desired to have the business of their boss grow with success.

So If you think that your business is doing good and need some additional capital for expansion, then you need to plan for that and think it over to have a successful business.

The Different Forms Of Small Business Finance

Any small business owner in operation today is actually an incredible and solid form of business ownership as well as being an integral part of the growth and health of the economy. Quite often, when public policy and economic decision making is undergone, they look at small businesses to see how they are faring and able to withstand the various different amounts of strain and tensions that the economy is being placed under. An incredible stress of any business is the financing options available to them which requires the knowledge of the various types of small business finance.

With any level of business financing, there are actually an incredible amount of options available that provide an incredible source of financing overall. Businesses must keep a very close eye on their options at all times in order to remain competitive and thing strategically regarding how they are able to move forward. Thus, understanding what all options are at all times is definitely a crucial element in this process.

Truly, at all times, any small business must maintain a solid grip on their cash flow. Being a good cash manage is often crucial for maintaining a level of financial well being as well as not having to depend as much on financing at all. Thus, this should always be a foundational business model process.

Debt financing is actually an incredible common form of small business finance available. Basically, this is where the finance company purchases the debt acquired by the business in exchange for repayment with interest. This is often performed at early stages of any small business.

For those that need more cash flow, business loans are actually often a very common source of business financing. This is basically much like a personal loan and requires a solid credit standing as well as an incredible amount of potential. This should actually be something that is reserved for the harshest of economic times for any business.

Investment in any business is also another incredibly common form of small business finance. Basically, this is something that involves a great deal of word or mouth and branding before it is offered to any company. Most businesses use this investment cash for expansion and upgrades to help the business grow and run efficiently over time.

Another form of business finance is through equity finance. Most often, this type of funding requires a decent level of credit standing as well as a very solid forecast of growth and potential to attract equity financiers. In this process, the business owner relinquishes a level of their ownership in the company in exchange for a set amount of financing that requires repayment and constant reporting to the equity finance company.

Finally, venture capital is often used as business finance for those wishing to take their business to the next level. This is acquired when a business is beginning the process of going public and wishing to sell themselves to the market. This funding is often used to increase the overall financial outlook of the company to make it more attractive.

Working Capital Business Financing Sources

Working Capital business financing is never a question of why – it’s just simply a matter of when! Working capital and cash flow are of course the heart of every business. The challenges of obtaining that financing become a question of time.

Perhaps you need cash for for your regular ongoing business cycle – that’s the simple one – you buy inventory, your produce things, you sell, bill and collect. In a perfect world your suppliers give you unlimited time to pay, and unlimited credit limits. And of course your customers pay you in exactly 30 days. Guess what? It’s not a perfect world!

If you are a traditionally financed firm you have access to bank capital for revolving credit lines based on your business needs. But for a growing number of Canadian firms that access to traditional bank capital is not available. Those scenarios require a special expertise in identifying sources of business financing that work for you. The solutions actually are quite numerous – its becomes a questions of which solution works for your firm, what are the costs involved, and does the solution fit within your business model.

The business financing we are talking about can take many different forms – it might include an asset based line of credit, inventory financing or purchase order financing, a sale leaseback on unencumbered assets,, working capital term loans, or accounts receivable financing, otherwise known as factoring.

One of the most important things you can do for business financing is to ensure that the type of financing you source matches your needs. What we mean by that is that you should match short term needs with short term financing. Factoring might be a good example. If your receivables aren’t financed, and you need cash to meet inventory and supplier commitments that type of financing is immediate and addresses your needs. Why would you enter into a five year term loan at fixed payments for a short term capital need or requirement?

The best way to think of short term financing is to focus on the current assets part of your balance sheet – those items include inventory and accounts receivable typically. Those assets can quickly be monetized into a working capital facility that comes in a variety methods. The reality is that your inventory and accounts receivable grow lock step to your sales and your ability to finance them on an ongoing basis will give you access to, in essence, unlimited working capital.

There are some solid technical rules of them around how you can generate positive pricing for operating facilities. By calculating and analyzing some basic financial ratios (we call them relationships) in your financial statements you can get a strong sense of whats available in working capital business financing and what pricing might be involved. Those ratios are your current ratio, your inventory turns, your receivables turns or days sales outstanding, a, and your overall debt to worth ratio. Depending on where those final ratio calculations come in will ultimately allow your working capital financier to put your firm in a low risk, medium risk, or high risk band of pricing?

In Canada working capital rates range from 8-9% per annum to 1-2% per month, depending on what assets are financed and how they are financed.

So whats our bottom line in working capital business financing? It is simply there are alternatives available and you as a business owner of financial manager can assess those alternatives in terms of short term needs or long term needs. Pricing and solutions vary, and your ability to convey the positive aspects of your business to the working capital lender will ultimately lead to a final pricing and solution. Speak to a credible, experienced and trusted working capital business financing advisor to determine what solutions are the best for your firm.