External financing is an essential lifeline for small businesses. According to the 2021 Small Business Credit Survey, 80% of firms faced financial challenges in the last 12 months. And many business owners addressed their cash issues using debt-based financing and emergency assistance funding.
However, as uplifting and empowering as business financing can be, it only works if utilized correctly. First, getting approved for business financing is not always a given. But you’ll stand in a better position for funding if you’re well prepared, looking in the right places, and know to avoid the various financing traps and pitfalls.
To that end, let's discuss the 10 common mistakes you should avoid when seeking business financing. These mistakes could jeopardize your chances for approval or diminish the overall value of funding.
Let’s dive in:
1. Going for too little or too much money
A common rookie mistake when raising business funds is targeting too much or too little cash.
Whether you’re applying for a business loan, line of credit, or other financing, asking for too little money will still leave you short-funded after approval. And grounding out a funding round might put you in an even worse financial situation than before. Inadequate funding will only increase your financial liabilities while falling short of its intended purpose.
Seeking too much cash can be problematic as well. If you sign more financing than needed, you might end up misusing the excess funds. Plus, you must consider repayment affordability because the more funding you get, the higher the repayments, rates, and costs.
Be realistic about your ask. Come up with a figure that aligns perfectly with the immediate need and your repayment ability.
2. Making a poor pitch
Getting approved for financing comes down to convincing the lender or investor that your business could use a cash infusion and is good for the money. Most lenders won’t so much as consider a poor or incomplete financing proposal. So, you might have to do much more than fill out forms to get a business loan or financing approved.
What does it take to convince a lender? First, present them with a flawless business plan demonstrating your financial strategy, business operations, mission, and grasp of the industry. Second, make a personal plea by showcasing your commitment, dedication, and motivation as an entrepreneur. This may not be strictly necessary for every financing venture. But you’ll definitely need a persuasive business argument to get long-term investors or lenders by your side.
3. Getting the timing wrong
There is such a thing as a wrong time to get business funding. When it comes to business financing and financial planning, timing is everything.
You don’t want to apply for funding too early and not put the money to good use or too late when the need for cash has already passed. Poor planning can put you in tough financial positions and let tantalizing business opportunities slip by.
Financial planning is mostly about anticipating future financial needs and preparing accordingly. Keep track of your cash flow, revenue projections, and expenses in order to forecast your business’s growth and cash needs months in advance. That way, you can always find the right time and reasons to take out external business funding.
4. Not researching multiple lenders
All lenders, funders, and investors are not created equal. Funding requirements, conditions, terms, standards, and delivery vary widely from lender to lender. For instance, some lenders only serve specific commercial industries, while others exclusively lend to businesses of a particular model or size. Financing products and funding structures vary between lenders as well.
Sticking to just one lender limits your financing scope to that one lender’s offering. You’ll miss out on the endless funding opportunities out there and possibly better terms, value, and services too. Instead, research multiple lenders before settling for a financing product. Consider all your options and possibilities by comparing quotes and terms from different funders. Shopping around is the only way to get the best possible deal.
5. Focusing on just one type of financing
Like sticking to one lender, focusing on just one type of business financing limits your options. Many entrepreneurs naturally go for traditional business loans when in need of cash. There’s nothing wrong with loans, except they’re not for everyone. There are so many other fitting ways to fund a business besides taking loans — some may even be less demanding and lower-risk.
Explore multiple financing options, including lines of credit, cash advances, credit cards, asset financing, and P2P lending, and pick the most suitable solution based on your needs and business model.
6. Fixating too much on the stakes
It’s only natural to worry about what you’re giving up in exchange for funding or the liabilities, costs, and obligations tied to a financing deal. For instance, you might have to give away equity in your company to secure angel/venture capital or surrender hard-earned personal assets as collateral for a secured business loan. But do not let this faze you from getting the much-needed financing. Focus on the bigger picture: what value does the financing bring to your business (the ROI), and does the outcome justify the stakes?
7. Lacking a proper repayment plan
Taking financing without a clear repayment strategy is a big mistake. The lender will obviously expect their money back within the agreed period. Missing or delaying payments often attracts heavy penalties and fines. Even worse, defaulting payments can lead to repossession, damaged business credit, and legal action. Defaulting ruins your relationship with the entire lending community, branding your business a “high-risk borrower.”
Be sure to run the numbers carefully when taking financing. Calculate the projected return on the investment to determine whether you can actually afford to pay the lender back. Also, be transparent with the lender about your repayment strategy and abilities to work out plausible repayment terms.
8. Stacking loans
Loan stacking means taking out multiple loans from various lenders. While having numerous active debts may not necessarily be a problem, it can be a risky and costly way to fund a business. First, multiple loans mean multiple rates and costs, which really add up in repayments. Second, managing multiple repayments can be a nightmare, especially with limited income.
Stacking loans is not always the best way to reach a financial goal. Plus, lenders see too much debt as a red flag. Try consolidating or refinancing your loans to maintain a reasonably healthy 28% to 35% debt-to-income ratio. You can also go for no-debt financing instead of piling on more debt.
9. Forgetting about hidden fees
Sometimes you only realize the actual cost of a financing deal when it's too late to turn back or negotiate the cost down. This happens when you forget to review the fine print in a financing agreement for hidden costs. In addition to the interest rate, look for additional loan fees such as origination, underwriting, service, bounce, closing, and payment processing charges. These seemingly petty dues can add up to as much as 6% of the principal amount and a sizable chunk of each repayment.
10. Going at it alone
Business financing is usually messy, cumbersome, and time-consuming, involving a lot of paperwork, haggling with lenders, and follow-ups. First, you have to research lenders, compare dozens of offers, and check your eligibility for various products just to find the best business loan or financing. Next is the application process, which mainly involves filling out lengthy forms, preparing countless documents, taking interviews, and a whole lot of back and forth with the lender. If this sounds like a lot of work, it is. But only when doing it alone.
Don’t hesitate to ask for expert assistance when applying for financing. There are countless tools and professionals that’ll do most of the heavy lifting for you, steering you from poor decisions and saving you a great deal of time, money, and energy. Lendzero is one such tool.
Lendzero pre-qualifies your business for various financing offers from multiple lenders. We also pre-negotiate every financing deal on your behalf to get the most favorable terms, limits, and rates. With Lendzero, you never have to scour the internet for financing deals or bargain with lenders to get much-needed business funding. Get Approved today and discover business financing at its fastest and most convenient.
