Avoid These Small Business Financing Mistakes

When you start a small business, you have a lot of things to consider. Not only are you making plans and defining your vision for the future of your company, but you have to find ways to pay for everything. Some companies seek financing as a startup, but most will seek it at some point in the first few years. Therefore, these are a few financing mistakes you should avoid.

Not Knowing Your APR

Every loan has an annual percentage rate. This is a yearly cost that you need to be aware of. This cost is what you pay to borrow the money you need. If you don’t understand and aren’t prepared to pay this cost, you can end up in default or drive your cash flows dangerously low.

Therefore, ask your potential lenders with the APR is on any loan you hope to secure if it is not provided to you. Also, be wary of the lenders that don’t give you this information upfront. They may not have your best interest in mind.

Short- Versus Long-Term Loan Treatment

Short-term loans are typically used to cover liquid capital shortages and often have a loan period of one year or less. Long-term loans typically last several years and are used for major purchases or funding for large projects. While you need to know the APR of your long-term loans, this factor is not as important for short-term loans. Instead, learn about all the costs and fees you will be responsible for on your short-term loans.

Not Getting Feedback

Being denied a loan can be embarrassing or disheartening, so many small business owners don’t investigate further. However, you need to know why you were denied the loan. If you don’t know the problem, you can’t fix it, and if your financial situation remains the same, you are more likely to get denied on future applications.

Once you know why you were denied, ask what you can do to improve these issues. For example, your company may have a low or no credit score, but your banker can give you ideas about how to increase or build your credit history, giving you a better chance at gaining future financing.

Overlooking Your Credit Utilization Ratios

When you apply for a business loan, both your personal and business credit utilization ratios are checked. These ratios compare your current debt with the amount of open credit you have. Both your personal and business ratios should be under 30%.

Whether you are in the startup phase or you have a well-established small business, you should understand common financing mistakes and how to avoid them.