Small business financing is a tricky business in and of itself. Knowing where to obtain financing, how much to take and at what interest rate requires extensive understanding of your company's current and projected finances. The financing you acquire will impact your company's long term growth and operations and, as such, taking too much or too little can be devastating. Below are 5 common small business financing mistakes:
1. Borrowing Too Much or Too Little
How much money you need depends on many factors. The cost of operating your business, projected growth and your current financial resources are just a few issues that will impact how much money you borrow. Borrowing too much money will drain your future cash reserves because you will need to begin making high repayments. Borrowing too little money is, essentially, pointless because you will be making payments on a loan that did not help you accomplish what you needed. The smartest amount to borrow is just a little bit more than you absolutely need to enable your business to operate and grow.
2. Borrowing at a High Interest Rate
If you are a new company or if your company currently carries a large amount of debt, you may not be able to obtain financing at an acceptable interest rate. A high interest rate can eventually crush your business under the weight of the repayments. Rather than accept whatever interest rate that is offered to you, try reducing your debt or tweaking your business plan to obtain a lower rate.
3. Not Borrowing from a Bank
Borrowing money from anyone or anything other than a secured financial institution puts you and your company's future at risk. A bank is insured and experienced in providing loans to small businesses; your friends, family and other non-bank business institutions are not. Borrowing from an institution other than a bank can mean a higher interest rate, shoddier collection methods or even mental or physical abuse to collect repayment.
Not borrowing from a bank also hinders your company's credit report. A loan taken from an institution that does not report to the credit agencies will not show your excellent repayment history, and therefore, will do nothing to help you obtain more or different financing in the future.
4. Repaying Faster than Necessary
You borrowed money to finance your business because your business needed it for operation and expansion. If you received a good interest rate, there should be no rush to repay the loan. Use the funds not allocated to monthly loan repayments and reinvest them to make your business even more profitable. If you would like to repay the loan of faster than its ascribed length, increase the amount you pay monthly only by a small amount.
5. Forgetting Marketing and Public Relations Investments
To make the money you borrowed work the best it can for you, reinvest a portion into your public relations and marketing campaigns. While the entire amount of your budgets for these aspects of your business should not come from borrowed money, do not overlook the need to make sure that they have ample budgets. These campaigns will draw more customers and help grow your business, which is the precise goal for which you borrowed funds.