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Getting your business off the ground is often of the hardest things to do as an entrepreneur, and it’s usually related to scrounging up the money you need to start. Nevertheless, there are a lot of ways you can finance your business other than the traditional business loan–most of which less complicated than you may think.
However, whether you go for a reverse mortgage or use your personal savings to fund your business, there is also a lot of room for error. To avoid unnecessary headaches in your entrepreneurial journey, here are several financing mistakes to avoid at all costs:
1. Borrowing more than you can afford
No matter how confident you may be in your projections for cash flow, do not ever borrow money that your small business can afford.
The main reason for this is that the more money you borrow, the higher you pay in interest, and that means higher monthly payments and/or a longer loan life. Not only that, but you’re also risking using up your future profits for loan payments and ruining both your personal and business credit in the process.
Even if the lender is offering you more money than you initially expected, borrow just enough. Don’t assume you’ll need the extra money for ‘something important’ later on. If you need additional funding in the future, that’s the only time you should borrow more money.
2. Borrowing too late
Aside from borrowing too much, avoid the mistake of borrowing too late as well. When your business is growing, it can be tempting to use cash flow or personal assets to fund expansions and avoid going to the lender for another loan. However, this puts your business in a precarious financial position. If your cash flow becomes insufficient to fund your investments, you may find yourself needing to borrow money fast.
Unfortunately, needing to borrow money within a short amount of time often puts business owners in a position of weakness. That said, you may find it more difficult to secure a loan with a reasonable interest as lenders will be apprehensive about loaning to entrepreneurs who seem to be poor planners (hence the urgency in borrowing the money).
3. Borrowing too little
Borrowing too much money can put your business in a risky financial spot. However, borrowing too little won’t do you any favors either. If you borrow an amount that’s lower than your projected expenses, you may find yourself in a tight spot when unexpected bills show up–and you never know when a piece of equipment might break down or when the HVAC system will stop working.
A great way to avoid this mistake is by including pessimistic and unforeseen contingencies in your cash flow forecast. In this way, you can determine how much money is enough to cover your expenses even if things don’t go according to plan.
4. Missing payments
Missing payments on your business loan is just like missing payments on the mortgage or your car loan–it creates even more debt and makes it harder to pay your next payment. More than that, your business credit can take a significant hit, which can affect your chances of securing a future loan.
Unfortunately, missing a loan payment is sometimes unavoidable. If you think that you’re going to miss a payment, contact your lender in advance and explain the situation.
Lenders can offer you an extension or perhaps a repayment plan that can make it easier for you to catch up on your payments. Whatever the case may be, it’s crucial that you contact them ahead of your payment deadline; don’t wait for the late payment fees to stack up or the notices to start piling up in the mailbox.
5. Paying back your loan too early
It makes sense to want to rid yourself of debt as quickly as possible, but it may not be the best move for your business. If making accelerated payments on your loan could leave your business short on cash (and you never know when this could happen), pay just the right amount every month.
Aside from risking cash shortage, you could also be putting down that extra money on investments for your business instead. So if the ROI is better for investments than paying off your loan faster, it’s best if you stick to your original payment plan.
Financing a business is never easy, especially for entrepreneurs that are just starting out. Hence, avoiding these common financing mistakes can make the difficult beginning stages a little less rocky and perhaps open up more opportunities for budding entrepreneurs.
Photo by George Becker from Pexels
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