Business is an unpredictable ground; on your first attempt, profits may plummet. For others, the business may never see through its first year. According to Investopedia, within the first two years, 30 percent of startups will fail; by the end of five years, 50 percent of startups will have closed down. Though there may be several reasons as to why this is so, poor financial acuity poses the most significant problem. You may have the most fabulous idea, and all the profits set out on paper, but the real challenge comes in executing your plan. With most businesses failing due to poor financial acuity, here are seven business mistakes that you need to avoid.
1. Taking a loan too late
The first instinct for any entrepreneur is to finance his business expansion from incoming cash flow. However, expanding your business using your cash can put your business under extreme financial pressure. To salvage your dwindling finances, you will be forced to apply for quick loans which will be done from a weak position. Ultimately, forcing you to accept anything you are offered. When a lending firm recognizes your urgency, the lender can provide you with a loan at a higher interest rate or fail to award you the loan altogether. It is therefore ideal to have a cash flow projection, which indicates monthly cash inflows and outflows. Additionally, include planned investments, afterward visit a lender and discuss the available plans.
2. Borrowing too much or too little
It is natural to be wary of the amount of debt that you have accrued. Howbeit, low-balling the amount of financial aid that you need can leave your business in need of resuscitation when unplanned expenses pop up. Alternatively, borrowing more than you need can cause your company to crush due to the high payments that you’ll be making. This means that you will have to use a portion of your profits to meet your loan payments. Even when a lender gives you more than you need, ensure to apply for what your business needs. This will allow you to make a substantial amount of profit without having to misuse the excess loan.
3. Borrowing a loan for the wrong purpose
There is a saying, “All loans are not created equal.” A long term loan is different from a short term loan, and so is a small business association loan and an equipment loan. The type of loan you choose will determine how long your business will operate. Here are a few facts about the above loans
• Long term loan
This type of loan is more conventional, and banks mostly award it. Primarily, banks will finance your business with any amount of money that is payable to them after an agreed period and on a set interest rate. This loan is not only ideal for entrepreneurs since it is affordable, but it also allows individuals to choose from a variety of loan options.
• Short term loan
This type of loan allows borrowers to have access to quick cash. However, this is only possible if they agree to a higher interest rate and a fast repayment schedule. This loan is only ideal if you experienced unexpected expenses or you are blacklisted from receiving other loan options.
• Small business association loan
Small business association loans cover a variety of loans. They offer microloans, usually 50,000 dollars, five million dollars or less, and term loans. For individuals to access any of these loans, you must have a flawless credit record along with an exciting business plan and a record of all your finances. However, it is worth noting that the SBA loan procedure takes ages before being approved.
• Equipment loan
These loans are ideal for small business owners who want to invest in new functioning equipment and machinery. Instead of individuals offering collateral on their loans, they can buy the equipment and have it placed as security for the loan.
4. Failing to pay loans on time
You can’t afford to miss paying your loan lest you risk your business failing. Failing to pay a loan or paying it late altogether will risk your credit score and have you incur unwanted penalties and fees. Additional fees will mean that on your next payment, you will have to pay significantly higher than you usually do. In case you are experiencing a lean period, contact your lender before the deadline, and agree on a new repayment plan.
5. Failing to shop for the best loan offer
Loan offers come in different plans. Some lenders might be ideal for you, while others may have lamentable plans. Shop for various lenders and go through their offers. Remember a difference of five dollars may seem insignificant, but when calculated with several months it can add to a significant amount.
6. Paying back your loan too fast
In an attempt to become free from debt, most borrowers might opt to pay their loans as soon as possible. However, as much as it may be essential to get rid of all your debts, paying your loan quickly, can significantly damage your finances. This is because you are reducing your cash flow, which you can use to expand your business. Compare how much you are saving by paying your loan quickly and how much you save by paying your loan as scheduled. If you wish to have more cash flow, then you need to consider reducing your repayment pace.
7. Using the wrong approach when pitching your lender
Most people can’t persuade a banker because they are ill- prepared when pitching. Most banks are interested in numbers, and numbers never lie. Banks are businesses; they are more interested in how they will benefit. Thus, the real hustle is convincing them that your business is worth what you are borrowing. However, in most instances, banks are never interested in offering loans to startups. This is because it poses a higher risk by investing in an unproven business model.
Business loans are ideal for companies that wish to remain afloat and compete. However, failing to organize your financial house may spell doom on your business. Without a full picture on your company’s finances, then you’re ill-prepared to engage on financial matters.