Seven Critical Business Financing Mistakes

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Seven Critical Business Financing Mistakes

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Business financing mistakes can be destructive to the advancement of your business and your business to keep smoothly moving.  To make a profitable business, you need to learn about 7 critical business financing mistakes that you should avoid. This is the focus of this article you are reading.

Committing these business financing mistakes often times will greatly jeopardize the chances you’ve got to maintain your business for a long time and to keep its success. This means that avoiding the top 7 business financing mistakes is a key component in business survival.

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

No Monthly Bookkeeping

Irrespective of the size of your business, inasmuch as the record is not accurately kept, it will definitely create all sorts of issues relating to cash flow, planning, and business decision making.

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

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

As a result, this one mistake tends to infect all the others anyhow. This is why it should be controlled.

No Projected Cash Flow

A well designed and well kept bookkeeping will enable a business to know its status. On the other hand, no projected cash flow creates a lack of knowing where you’re going.  What this means is that, failure to keep score or record, businesses tend to stray further from their targets and wait for a crisis that forces a change in monthly spending habits. Therefore, for a cash flow to be projected, there is need to make it a reality and realistic. One way this could be done is to make a certain level of conservatism which needs to be present, or it will become meaningless in short period of time.

Inadequate Working Capital

The truth here is that, there is no amount of record you keep that will help you if you without enough working capital to properly operate the business.

What helps in this case is to create accurate cash flow forecast before you 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 no fund sufficient enough to properly manage through the normal sales cycle.

Poor Payment Management

It is only when you have a realistic 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 and if care is not taken, this can be the very edge of the slippery slope.

On the other hand, if you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may expose the business to more crises. The primary targets are government remittances, trade payables, and credit card payments.

Poor Credit Management

There can be severe credit consequences to deferring payments for both short time and indefinite periods of time.

It is however important to know that:

  • Late payments of credit cards are probably the most common ways in which both businesses and individuals destroy their credit.
  • NSF checks are also recorded through business credit reports and are another form of black mark.
  • If you put off a payment too long, a creditor could file a judgment against you. This is further damage to your credit.
  • As you apply for future credit, being behind with government payments can result in an automatic turndown by many lenders. And each time you apply for credit, credit inquiries are listed on your credit report.

There are however, two additional problems this could cause:

  1. Multiple inquiries can reduce your overall credit rating or score.
  2. Lenders tend to be less willing to grant credit to a business that has a multitude of inquiries on its credit report.

It may occur that you run into short cash for some particular period of time. If this happens, make sure you discuss the situation with your creditors and negotiate repayment arrangements that you can both live with and that won’t put your credit into any jeopardy.

No Recorded Profitability

The most important step for any start ups to take as far as financing point of view is concerned is to get profitable as fast as possible.

For most lenders, they need to see at least one year of profitable financial statements before they will be ready to give funds after weighing the status of your business worth. Also, before short term profitability is demonstrated, business financing is based primary on personal credit and net worth.

Aside from start ups, existing business historical results need to show profitability to acquire additional capital.

The ability to repay is measured by the net income recorded for the business by a third party accredited accountant.

It happens many times that 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.

No Financing Strategy

Any business that doesn’t have a proper financing strategy will run into problem. Therefore,  a proper financing strategy creates the followings:

  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.

The three mentioned above sounds good. However, it doesn’t seem to be well practiced. This is 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.

Furthermore, there are many reasons for this. It includes: entrepreneurs are more marketing oriented, people believed to make financing more easily and secured.

No matter the reason, the lack of a workable financing strategy is indeed a mistake.

Finally, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present. This stress the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.