Small businesses often need financing to help them achieve the next stage in their growth. Whether this be for new equipment or extra vehicles like trucks or cars. The trouble is, so many business owners do not know which financing pitfalls to avoid. Here are 6 mistakes small business owners commonly make when searching for financing.
1. Borrowing more than you can afford
Over borrowing is a common mistake small businesses make when they find out that their lender will offer them far more money than they initially expected. They simply take all of it without thinking. But this can cause massive financial problems further down the line. Your business will become stuck in interest repayments that suck out the profits you are making, potentially at a time when you need them the most. You will destroy your cashflow and leave yourself stuck with a bad credit rating for both your business and yourself.
Instead be a conservative borrower, only take what you need. It is not worth the risks taking any more. Your interest repayments will simply increase the more you borrow. All these extra repayments for money you might not even use! It is better to seek additional funding only when you need it.
2. Choosing the wrong sort of financing
Financing is not as simple as going to a bank and getting a loan, there are many different types of loans available to small businesses. Choosing the correct one that is suited to your needs is paramount. Each come with their own benefits and negatives. Here are the most common types:
Short term loans: These loans are great if you need cash fast. However, they come with high interest rates and aggressive repayment terms. This type of loan is perfect if you need some quick cash to pay off an oncoming bill or any other unexpected expenses but don’t quite have the cashflow yet.
Long term loans: These are the traditional loans that you may get from a bank or other traditional lender. This loan type comes with a varying degree of conditions depending on the lender and your personal circumstances. The interest rates and repayment times tend to be less aggressive than short term loans providing businesses a more affordable method of generating a large amount of cashflow. However, to get one of these loans you will need a good credit rating to gain approval.
Equipment loans: If you need financing for a piece of equipment then equipment loans are perfect for you. This type of loan allows you to use the equipment itself as collateral for the loan. By taking advantage of this type of loan you will receive the equipment you need without tangling up any capital as collateral for your loan.
3. Lack of lender research
There are far more lender options than the big 4 banks. When looking for financing it is incredibly important to look beyond the big 4 banks and do some research. Find out what other lenders suit your needs and what perks their loans come with.
You may not even have to go with a bank at all. There are many funds dedicated to start-ups across Australia. So, if you want financing ensure that you do your research to get the loan that is right for you.
Better yet, just talk to a finance broker, more on that later.
4. Getting behind on payments
Getting behind on your loan repayments could spell disaster for your business. Some lenders may charge you penalties or fees that can leave you struggling and your cashflow diminished. This will make it harder to cover further repayments, potentially causing your business to enter a death spiral. Your credit rating could also take a hit. If you think that you won’t be able to meet a repayment talk to your lender. Most will be willing to work with you to create a new repayment plan.
5. Prioritising growth over solid cashflow
It is important for businesses to grow. Everyone wants to see their business become extremely successful and service a range of customers. However, you should be careful when considering financing for growth. Think, will taking this opportunity to grow put a massive strain on your business that in the end isn’t worth the returns? Just because you can quickly borrow money to pursue this growth doesn’t mean that you should. Instead you should focus on ensuring that your cashflow is strong and that the opportunity is equally as strong before pursuing financing.
6. Not contacting a finance broker
A big mistake that is common amongst small businesses is not talking to a finance broker first. Instead they go around to different banks, find only subpar loans, then get denied because of a bad credit rating. When did this bad credit rating appear? When you were shopping around. Often declining a loan offer with a bank will have a negative effect on your credit rating.
The best way to avoid a hit to your credit rating and find loans that better suit your situation is by talking to a finance broker. They offer a service specifically designed to help you find the best financing deal possible.
If you need help receiving financing for your small business contact ASA Finance Group today.