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General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
10 Simple Business Financing Mistakes
and How to Avoid Them
For any small business owner, securing and managing financing is a critical component of survival and growth.
Yet, the path to sound financial health is often riddled with pitfalls.
Many entrepreneurs, driven by passion for their product or service, can inadvertently make "simple" mistakes in their approach to funding that can have significant and lasting negative consequences.
This article will illuminate ten common missteps in business financing, offering insights and actionable advice to help you navigate this complex landscape successfully.
Understanding these errors is the first step to avoiding them and building a financially resilient business.
10. The Shaky Foundation –
Flawed Planning and Preparation
Before you even think about applying for a loan or seeking investment, groundwork is essential. Many financing rejections and future problems stem from inadequacies in this initial phase.
Mistake: The "Back-of-the-Napkin" Business Plan
Many passionate entrepreneurs start with a brilliant idea but fail to translate it into a comprehensive, well-researched business plan. Lenders and investors aren't just funding an idea; they're investing in a viable business model with a clear path to profitability.
A vague or incomplete plan signals a lack of seriousness and an inability to think strategically.
● Why it's a problem: Without a detailed roadmap, you can't articulate your funding needs precisely, nor can you convince potential financiers of your ability to generate returns. It makes it impossible to project cash flows, identify target markets, or outline operational strategies – all critical components lenders scrutinize.
● The Fix: Develop a thorough business plan that includes an executive summary, company description, market analysis, organization and management structure, services or product line, marketing and sales strategy, and – crucially – detailed financial projections (income statement, cash flow statement, balance sheet) for at least three to five years. This document is your primary selling tool.
Mistake: Underestimating (or Overestimating) Funding Needs
Asking for too little money can be just as detrimental as asking for too much. If you underestimate, you might find yourself short on crucial working capital mid-way through a project or growth phase, forcing you to seek more funding under duress, often on less favorable terms. Conversely, borrowing too much means paying interest on capital you're not utilizing effectively, unnecessarily draining resources.
● Why it's a problem: Insufficient funding can stall operations or prevent you from capitalizing on opportunities. Excessive debt can cripple cash flow with high repayment obligations, increasing your business's risk profile.
● The Fix: Base your funding request on meticulous financial projections from your business plan. Break down exactly how the funds will be used (e.g., equipment purchase, inventory, marketing, hiring). Include a contingency fund (typically 10-20% of the total) for unexpected expenses. Clearly justify the amount requested and demonstrate your capacity to manage it.
Mistake: No Clear Purpose for the Funds
Approaching lenders with a vague "I need money to grow" isn't compelling.
Lenders want to see a specific, strategic use for their capital that will demonstrably improve the business and its ability to repay the debt.
● Why it's a problem: It suggests a lack of clear strategy or an attempt to use business funding to cover fundamental cash flow problems stemming from other issues. This makes lenders nervous.
● The Fix: Clearly define the purpose of the financing. Is it for working capital, purchasing specific equipment, expanding to a new location, launching a new product line, or refinancing existing debt? Each purpose may align better with different types of financing. Articulate the expected return on investment for the borrowed funds.
9. The Ticking Clock – Fatal Timing Errors
The timing of your financing quest can significantly impact your chances of success and the terms you receive.
Mistake: Waiting Until You're Desperate
One of the most common and damaging mistakes is waiting until the coffers are nearly empty before seeking financing. When you're desperate, your negotiating power plummets, and you're more likely to accept unfavorable terms out of sheer necessity. Lenders can sense desperation and may view your business as a higher risk.
● Why it's a problem: Applying for funding under pressure limits your options, rushes your due diligence, and may lead to predatory loans. It also suggests poor financial planning.
● The Fix: Proactively monitor your cash flow and anticipate future funding needs well in advance (6-12 months if possible). The best time to apply for a line of credit, for instance, is when your business is performing well, not when it's struggling. Build relationships with bankers even before you need funding.
Mistake 5: Misjudging the Application and Approval Timeline
Securing business financing is rarely a quick process.
Depending on the type of funding, it can take weeks, or even months, from application to disbursement.
Underestimating this timeline can leave your business in a lurch if funds are needed by a specific date.
● Why it's a problem: If you need funds for a time-sensitive opportunity (e.g., a bulk inventory discount, a down payment on a new lease) and haven't factored in the approval time, you could miss out.
● The Fix: Research the typical timelines for different financing options. For example, SBA loans are known for longer processing times, while online lenders might be quicker but potentially more expensive. Start the application process early and maintain open communication with potential lenders about your deadlines.
8. The Numbers Game –
Financial Illiteracy and Poor Record-Keeping
Your financial statements tell the story of your business. If that story is unclear, inaccurate, or incomplete, lenders will hesitate.
Mistake: Sloppy or Non-Existent Financial Records
Many small business owners are experts in their trade but novices in accounting. Maintaining accurate, up-to-date financial records (bookkeeping) is non-negotiable.
Without them, you cannot produce reliable financial statements, track performance, or make informed business decisions, let alone secure funding.
● Why it's a problem: Lenders rely heavily on historical financial data (income statements, balance sheets, cash flow statements) to assess creditworthiness and repayment ability. Inaccurate or missing records are a major red flag, often leading to immediate application rejection.
● The Fix: Invest in good accounting software (e.g., QuickBooks, Xero, Wave) from day one. If bookkeeping isn't your strength, hire a professional bookkeeper or accountant. Regularly review your financial statements to understand your business's health. Ensure your records are consistently reconciled.
Mistake: Not Understanding Your Own Financial Statements
Even if you have an accountant preparing your financials, you, as the owner, must understand what they mean.
Can you explain trends in your revenue, your gross profit margin, or your debt-to-equity ratio?
If not, you can't effectively discuss your business's financial health with lenders.
● Why it's a problem: Lenders will ask questions about your financials. If you can't answer confidently or seem unsure about your own numbers, it undermines their confidence in your ability to manage the business and their funds.
● The Fix: Take the time to learn basic financial literacy. Understand key metrics like gross and net profit margins, working capital, current ratio, and debt service coverage ratio. Ask your accountant to explain these reports to you until you're comfortable discussing them.
Mistake: Failing to Separate Personal and Business Finances
Using your personal bank account for business transactions or vice-versa (commingling funds) is a recipe for disaster.
It creates a nightmare for bookkeeping, makes it difficult to track business performance accurately, and can have serious tax and legal implications, including piercing the corporate veil if your business is incorporated.
● Why it's a problem: Lenders want to see a clear financial picture of the business itself. Commingling funds obscures this picture, makes due diligence harder for them, and suggests a lack of professionalism or financial discipline.
● The Fix: Open a dedicated business bank account and credit card as soon as you start your business. Run all business income and expenses through these accounts. Pay yourself a formal salary rather than making random withdrawals. This separation simplifies accounting, tax preparation, and financial analysis.
General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
7. The Wrong Tools –
Mismatching Funding Types to Needs
Not all financing is created equal. Using the wrong type of loan or investment for your specific need can lead to inefficiencies or financial strain.
Mistake: Using Short-Term Funding for Long-Term Assets (and Vice-Versa)
Financing a long-term asset (like a major piece of equipment with a 10-year lifespan) with a short-term loan (e.g., a 1-year term) can create severe cash flow pressure due to high, frequent repayments.
Conversely, using long-term debt for short-term needs (like seasonal inventory) means you'll be paying interest long after the need has passed.
● Why it's a problem: This mismatch can strain cash flow unnecessarily or lead to paying more interest than required. It doesn't align the repayment structure with the asset's income-generating potential or the duration of the need.
● The Fix: Match the loan term to the life of the asset or the duration of the need. For equipment, consider equipment financing or longer-term loans. For working capital or inventory, a line of credit or short-term loan might be more appropriate.
Discuss this with your financial advisor or lender.
Mistake: Overlooking or Misunderstanding Equity Financing
Many owners are solely focused on debt financing (loans) and overlook equity financing (selling a stake in the business). Others may pursue equity without fully grasping the implications of giving up ownership and control.
● Why it's a problem: For some businesses, especially high-growth startups with limited collateral or cash flow for debt repayment, equity can be a more suitable option. However, it means diluting your ownership and potentially answering to investors. Not understanding these trade-offs can lead to future conflicts or loss of control.
● The Fix: Understand the difference between debt and equity. Debt requires repayment with interest but doesn't dilute ownership. Equity involves no repayments but means sharing profits and ownership. Evaluate which structure aligns with your long-term vision, growth stage, and risk tolerance. Seek legal advice before entering into any equity agreements.
Mistake: Ignoring Niche or Alternative Financing Options
Traditional bank loans aren't the only game in town. There's a growing landscape of alternative financing, including online lenders, invoice financing, equipment leasing, merchant cash advances, crowdfunding, and government-guaranteed loan programs (like SBA loans). Ignoring these can mean missing out on more suitable or accessible options.
● Why it's a problem: You might be rejected by a traditional bank but could qualify for an alternative. Or, an alternative option might offer better terms or a faster process for your specific situation.
● The Fix: Research all available funding avenues. Online lenders often have more flexible criteria but potentially higher rates. Invoice financing can unlock cash tied up in unpaid invoices. SBA loans can offer favorable terms but require more paperwork. Understand the pros and cons of each before deciding.
6. The Personal Peril –
Blurring Lines and Overextending
Your personal financial health is often intertwined with your business's, especially in the early stages. Mismanaging this connection is a common error.
Mistake: Excessive Reliance on Personal Credit Cards and Home Equity
While convenient, funding your business heavily through personal credit cards or a home equity line of credit (HELOC) is incredibly risky. Interest rates on personal credit cards are typically very high, and using a HELOC puts your home on the line if the business fails.
● Why it's a problem: This blurs personal and business liabilities, exposes personal assets to business risks, and can quickly lead to a personal debt spiral if the business struggles. It also doesn't help build business credit.
● The Fix: Prioritize building business credit and seeking dedicated business financing. Use personal funds or credit sparingly and strategically, ideally as a last resort or for very short-term needs, with a clear plan for repayment. Always understand the risks involved.
Mistake: Not Understanding Personal Guarantees
Most small business loans, especially from traditional lenders, require a personal guarantee from the owner(s). This means if the business defaults on the loan, you are personally liable for repaying the debt. Many owners sign these without fully appreciating the implications.
● Why it's a problem: A personal guarantee pierces the liability protection offered by corporate structures like LLCs or corporations for that specific debt. Your personal assets (home, savings) could be at risk.
● The Fix: Always read loan agreements carefully, specifically sections related to personal guarantees. Understand what assets are pledged and the extent of your personal liability. If possible, negotiate the terms of the guarantee (e.g., limiting its scope or duration), though this can be difficult for new or smaller businesses. Seek legal counsel to understand the full ramifications.
5. The Price of Money –
Misinterpreting Loan Terms and Costs
The interest rate is just one part of the cost of borrowing. Many other fees and terms can significantly impact the overall expense and burden of a loan.
Mistake: Focusing Solely on the Interest Rate
While the interest rate is a key factor, it doesn't tell the whole story.
Lenders may offer a low headline interest rate but compensate with high origination fees, application fees, closing costs, prepayment penalties, or other charges.
● Why it's a problem: You might choose a loan with a lower interest rate that ends up being more expensive overall due to hidden fees. This makes it hard to compare offers accurately.
● The Fix: Always look at the Annual Percentage Rate (APR), which includes most fees and gives a more accurate representation of the total cost of borrowing. Ask for a full schedule of all fees associated with the loan. Compare loan offers based on APR and total repayment amount, not just the interest rate.
Mistake: Not Reading or Understanding the Fine Print
Loan agreements are legal documents, often lengthy and filled with complex jargon.
Failing to read and understand every clause can lead to unwelcome surprises later, such as restrictive covenants, default conditions, or unexpected fees.
● Why it's a problem: You could inadvertently violate a loan covenant (e.g., maintaining a certain debt-to-equity ratio), triggering a default. You might also be unaware of penalties for early repayment if you wish to refinance later on better terms.
● The Fix: Take the time to read the entire loan agreement. If you don't understand something, ask the lender for clarification. Better yet, have your lawyer review the agreement before you sign it. Pay close attention to clauses regarding default, collateral, covenants, and prepayment penalties.
Mistake: Ignoring the Impact of Loan Covenants
Loan covenants are conditions imposed by lenders that businesses must adhere to throughout the loan term. These can be financial (e.g., maintaining a certain level of working capital or profitability) or non-financial (e.g., restrictions on selling assets or taking on additional debt).
● Why it's a problem: Violating a covenant, even unintentionally, can put your loan into default, allowing the lender to demand immediate repayment or seize collateral. This can happen even if you're current on your payments.
● The Fix: Fully understand all covenants before signing. Realistically assess your ability to comply with them throughout the loan term. Set up internal monitoring systems to track your compliance with these covenants and proactively communicate with your lender if you anticipate any issues.
4. The Relationship Dance –
Poor Lender Interaction and Lack of Diligence
Securing financing is not just a transactional process; it’s also about building relationships and doing your homework.
Mistake: Not Shopping Around for Lenders
Accepting the first loan offer you receive, or only approaching one bank (perhaps your personal bank), is a common mistake. Different lenders have different risk appetites, specialties, terms, and rates.
● Why it's a problem: You might miss out on more favorable terms, lower interest rates, or a loan product better suited to your needs. Without comparison, you have no benchmark to assess if an offer is competitive.
● The Fix: Approach multiple lenders, including traditional banks, credit unions, online lenders, and specialist finance providers. Prepare a consistent loan package to present to each. Compare their offers meticulously, looking beyond just the interest rate to APR, fees, terms, and covenants.
Mistake: Poor Communication or Lack of Transparency with Lenders
Lenders value honesty and transparency. Trying to hide negative information, being evasive with answers, or presenting overly optimistic and unsupported projections can damage your credibility.
● Why it's a problem: If lenders suspect you're not being forthright, they are unlikely to approve your loan. Even if they do, a lack of ongoing communication can turn minor issues into major problems later.
● The Fix: Be upfront and honest in your application and all communications. If there are weaknesses in your business or financial situation, address them proactively and explain how you plan to mitigate them. Once you have a loan, maintain regular communication, especially if you anticipate any challenges in meeting your obligations.
Mistake: Not Tailoring Your Pitch to the Lender
Different lenders specialize in different types of loans or industries. A generic application that doesn't speak to a specific lender's focus is less likely to succeed.
● Why it's a problem: Lenders want to see that you've done your homework on them and understand their lending preferences. A generic pitch feels impersonal and less compelling.
● The Fix: Research potential lenders to understand their preferred industries, loan sizes, and types of financing they offer. Tailor your business plan's executive summary and your verbal pitch to highlight how your needs and business align with their focus.
3. The Cash Flow Conundrum –
Ignoring Working Capital and Repayment Realities
Cash flow is the lifeblood of any business. Mismanaging it in relation to debt is a fast track to failure.
Mistake: Underestimating the Impact of Debt Repayments on Cash Flow
Taking on debt means committing to regular repayments. Many business owners focus on securing the loan but fail to realistically model how these repayments will affect their day-to-day cash flow.
● Why it's a problem: If loan repayments consume too much of your available cash, you might struggle to cover operational expenses, pay suppliers, or invest in new opportunities, leading to a perpetual cash crunch.
● The Fix: Before taking on any debt, create detailed cash flow projections that incorporate the new loan repayments. Stress-test these projections under different scenarios (e.g., a dip in sales). Ensure you have a comfortable buffer. The Debt Service Coverage Ratio (DSCR) is a key metric here; lenders typically want to see it above 1.25x, meaning your cash flow is at least 1.25x times your debt obligations.
Mistake: Borrowing More Than You Can Realistically Repay
It can be tempting to take the maximum amount a lender offers, but this isn't always wise. Your borrowing capacity should be dictated by your repayment capacity, not just by what's available.
● Why it's a problem: Over-borrowing leads to excessive debt service costs, straining cash flow and increasing the risk of default. It can make your business fragile and unable to withstand economic downturns or unexpected setbacks.
● The Fix: Be conservative in your borrowing. Focus on the minimum amount you need to achieve your specific objectives. Ensure your revenue and profitability projections realistically support the proposed debt level. Don't let ego or ambition lead you into unmanageable debt.
Mistake: Not Having a Contingency Plan for Repayment Difficulties
Business is unpredictable. Sales can dip, unexpected expenses can arise, or economic conditions can change, making it difficult to meet loan obligations. Not having a plan for such scenarios is shortsighted.
● Why it's a problem: If you hit a rough patch and can't make payments, you risk defaulting on your loan, damaging your credit, and potentially losing your business or personal assets (if a personal guarantee is in place).
● The Fix: Build a cash reserve (emergency fund) for your business that can cover several months of operating expenses, including debt repayments. Identify areas where you can quickly cut costs if necessary. Most importantly, if you anticipate trouble, communicate with your lender before you miss a payment. They may be willing to discuss temporary forbearance or loan modification options if you're proactive.
General Requirements (takes about 5-minutes or less to apply online)
680 FICO score (Transunion or Experian FICO model 8.0 or similar)
Less than -15% operating loss in the last year of business
Last 2-Years of filed Business Tax Returns; Last 1-Year of filed Personal Tax Returns
Last 3-months of bank statements; copy of Driver’s License
2. Future-Proofing –
Neglecting Credit and Long-Term Financial Health
Securing one round of financing isn't the end of the journey. Building a strong financial reputation is crucial for future needs.
Mistake: Failing to Build and Monitor Business Credit
Just like personal credit, businesses have their own credit profiles and scores. Many small business owners are unaware of this or don't actively work to build a strong business credit history.
● Why it's a problem: A poor or non-existent business credit history can make it harder and more expensive to secure financing, obtain favorable terms from suppliers, or even lease equipment in the future. Lenders will often check both personal and business credit.
● The Fix: Establish credit accounts in your business's name (e.g., business credit cards, vendor trade lines). Pay all bills on time or early. Regularly monitor your business credit reports from agencies like Dun & Bradstreet, Experian Business, and Equifax Small Business to check for errors and understand your standing.
Mistake: Damaging Relationships with Lenders
Your current lender can be a valuable partner for future financing needs. However, poor communication, late payments, or failing to adhere to loan terms can sour this relationship.
● Why it's a problem: A damaged lender relationship can make it difficult to obtain additional funding or favorable modifications if needed. Word can also travel within the financial community.
● The Fix: Treat your lender as a partner. Maintain open and honest communication, meet your obligations diligently, and provide any required financial reporting promptly. Even if you face challenges, being transparent and proactive can preserve goodwill.
1. The Aftermath and Beyond –
Poor Debt Management and Lack of Forward Thinking
Once you’ve secured funding, the work isn’t over. Managing that debt wisely and planning for the future is just as important.
Mistake: No Strategy for Debt Repayment or Reduction
Simply making minimum payments without a broader strategy can keep your business in debt longer than necessary, accruing more interest.
● Why it's a problem: Prolonged debt can limit your business's flexibility and profitability. High debt levels can also deter future investors or lenders.
● The Fix: If cash flow allows, consider making additional principal payments to reduce debt faster, especially on higher-interest loans (check for prepayment penalties first). Periodically review your debt structure; refinancing might be an option if interest rates have fallen or your credit profile has improved. Have a clear goal for becoming debt-free or reaching a more manageable debt level.
Mistake: Not Reviewing or Adjusting Your Financing Strategy Post-Funding
The financing strategy that worked for your startup phase may not be appropriate as your business grows and evolves. Economic conditions also change.
● Why it's a problem: Sticking with an outdated financing mix can mean you're paying too much for capital or not utilizing the most efficient funding sources available for your current stage.
● The Fix: Regularly (at least annually, or when major business changes occur) review your overall financing structure. Assess if your current debt and equity mix is optimal. Explore new financing products or opportunities that may have emerged. Be prepared to adapt your strategy to support your evolving business goals.
Mistake: Failing to Learn from Past Financing Experiences
Every financing process, successful or not, offers valuable lessons. Not reflecting on these experiences means you're likely to repeat mistakes.
● Why it's a problem: You miss opportunities to refine your approach, improve your financial management, and strengthen your position for future funding needs.
● The Fix: After each financing round or attempt, conduct a post-mortem. What went well? What didn't? What feedback did you receive from lenders? How could your preparation or presentation be improved? Document these lessons and use them to inform your future financial planning and decision-making.
Your Financial Future is in Your Hands
Navigating the world of business financing can seem daunting, but by understanding these common pitfalls, you are already significantly better equipped than many of your peers.
Sound financial management isn't just about securing a loan; it's about strategic planning, meticulous record-keeping, understanding your options, and building strong relationships.
By avoiding these simple yet costly mistakes, you can build a more resilient, profitable, and sustainable business, ready to seize opportunities and weather any storm.
Take control of your financial destiny – your business depends on it.
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Schedule a consultation today and take the first step toward saving your business and your future.
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Bernarsky Advisors
Business Finance and Strategy Advice
Refinance. Restructure. Reorganize.
(See more of our articles about Business Finance and Strategy below…)
WHAT IS THE BEST AND SAFEST WAY FOR YOUR BUSINESS TO DEAL WITH HIGH BUSINESS DEBT PAYMENTS?
It is NOT by stopping ACH payments.
It is NOT by taking on another business loan.
It is NOT ALWAYS a Refinancing
It is NOT by entering into a debt settlement program.
Find out the BEST strategies to get your Business back to where it was
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