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If your business is growing and needs to expand, you’re likely going to need to find a financing solution that is right for your business. With the tight credit market, banks have narrowed their lending requirements and as a result, it’s more difficult for an entrepreneur or small business to acquire working capital today than in the past.
What it Means
Today, businesses are doing their best to get creative, often acquiring financing from a variety of sources. The process of finding working capital financing today is quite confusing, and unfortunately a wide gap between prime rates and predatory rates currently exists. Some lenders are rising up to fill this gap, but not at the speed required to help businesses in that critical time of not being bankable and needing capital for growth on the road to being profitable.
Choosing the Right Financing Opportunity: Why it Matters
The right small business financing will make a significant difference in the success of your business. Especially for new business owners, there is an increased importance on having access to capital—even if it comes at a cost—when you need it. When you find yourself in a perfect storm of rapid growth, slow paying customers, and irregular cash flow, you end up in a precarious position of not being able to make payroll, buy more inventory, or meet other monthly obligations. Weathering the storm with the wrong financing solution is a factor that takes many businesses out of the game altogether. The good news is that there are plenty of opportunities for you to make the right decision.
To do that, here’s a list of the biggest mistakes that small business owners make when starting their business.
1. Poor planning
The biggest reason that businesses fail isn’t money alone, but can be attributed to poor planning. Poor management of the business is a major reason a business may fail. Poor planning often causes an owner or management team to be reactive instead of proactive, and being proactive is key in seeking funding and being objective in selecting funding.
2. Lack of funding
Another clear reason businesses fail is because of inadequate funding. If you have too little or not enough financing, your business may fail. Smart business owners diversify their funding streams and project losses well in advance, which allows them to seek out funding options and be prepared for difficult financial situations.
3. Access to capital in the crunch times
Having enough capital that is easily accessible is quite important. Businesses should try to get a line of credit, whether through a bank line, an asset-backed line, or a receivables-backed line like P2Binvestor offers, so help be a fail-safe when things don’t go as planned, to deal with seasonal fluctuations, or when funds become tight.
4. Poor financial management
The skills in managing those funds are just as important. You need to make sure that the person who is managing the money isn’t spending too much but is spending enough to keep the business running correctly.
5. Choosing the wrong loan or other financing.
The wrong loan with the wrong rate with the wrong financing company is a serious error made by many small businesses. This often happens when business owners or managers have not been proactive when it comes to steps 1-4, and as they say, ‘desperate times call for desperate measures.’ Watch out for costly interest rates, poor terms, or the wrong type of loan to avoid facing more serious problems down the road. When selecting a small business loan or other financing options, knowing which type you need and in what amount is vitally important.
So what are the options when it comes to making an informed, educated choice among funding options?
If your business can qualify, the most desirable and affordable financing option is a traditional bank loan. Banks can borrow money at very low rate from the Federal Reserve, so they can pass those savings onto customers in the form of low rates along with long repayment terms. However, banks are incredibly strict in which businesses they lend to, and many business owners and entrepreneurs find bank underwriting processes and policies to be extreme.
Even more established businesses still can have trouble acquiring bank financing because of any discrepancies in the owners personal credit score, lack of collateral, and numerous other factors.
Alternative lenders have to pay more for their capital and must then lend on top of that, which is why alternative lending options will almost always be more expensive than a bank loan. It’s important to learn about all of the different types of alternative financing options available and determine which one is right for your business. Then, you’ll be able to make an informed decision that will give your business the best chance of succeeding.
More resources for funding your small business:
Where to get a small business loan- Entrepreneur