7 Common Financing Mistakes Businesses Make

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Starting a small business is a big step in the journey of any small business owner. But that’s just the first step, and there’s a lot you must take into account. As a matter of fact, one of the main causes of business failure are financial hurdles — and we will discuss some of the most common financing mistakes businesses make in this article.

Of course, as a small business owner, you and your accountant already understand some of your small business’s best financing practices. But you’d be surprised to know how some of the most common financial mistakes we’ll discuss in a bit impact a business owner’s bottom line: make money and make sure their small business thrives. Learn a few of them and the best practices to take for you to avoid them.

It’s More Important Than Ever Business Owners Avoid These Common Financial Mistakes if They Want Their Business to Thrive:

With the current U.S. inflation — and other economic factors that happened throughout these weeks in the banking system — making sure your business has capital is the only survival guarantee you might have — as a banking crisis tends to bring bad news for small businesses. But to maintain your business capital steady and profitable, you must pay attention and avoid common pitfalls.

With the possibility of a cost of living crisis due to inflation, it’s more challenging for business owners and entrepreneurs to make more of their dollars than ever. It’s understandable if you’re feeling stressed, as the dollar bill in your hand seems to be getting as valuable as a piece of paper the more you look at her.

The banking system is not helping the situation either. With fears of another banking collapse, small business owners are afraid of another 2008 financial crash, and rightfully so. Small businesses were the ones who suffered the most throughout it — not to mention the difficulties this brings should you need business financing.

But, although the economic and living crisis is out of our direct control, we can still influence some situations. Your small business finances are one of them, and avoiding some of the most common financial mistakes most businesses make can very well put you and your small business ahead of the competition — and in a prime position to ensure it withers this storm.

7 of the Most Common Financing Mistakes Businesses Make:

Neglecting a Sustainable Budgeting Practice:

A budget is a financial decision that helps small businesses to make crucial decisions — or at least helps them to have a rough estimate of how much they can spend or allocate towards their business. But many small business owners neglect this practice and go on to spend more than they produce or don’t account for any other business expenses that might come along the way.

A budgeting practice doesn’t allow you to just have an emergency fund should your business need it — which, in today’s economic climate, is a very sound decision. But having other types of budgets in different business bank accounts — a budget for marketing, shipments, suppliers, bills, etc. — will be a big step forward in your business’s financial health.

Not Separating Their Business Finances:

Mixing business and personal finances is a common first mistake for new businesses — and one of the biggest missteps you should avoid on your own business. While it might seem like a great choice when you start, and you can still use some of your personal finances, you must separate them as soon as possible.

If you don’t separate your personal and business spending, you will regret that decision come tax time. Your bookkeeping will be all over the place, and you or your accountant will spend a lot of unnecessary time and energy gathering deductible and non-deductible expenses. Plus, it will impact your business credit score improvement — meaning more difficulties for you to get a loan.

Spending Too Much Too Soon:

Every business needs smart investments to be profitable and thrive. But one of the biggest mistakes new business owners make is to start buying all the equipment, supplies, vehicles, real estate, etc., too fast. This will put your business’s finances in a hole and leave you and your business cash-poor very early on.

The best way to avoid over-investing is to really think of what your business needs right now. For example, Do you need an extra vehicle, or can it wait a couple more months? Do you need to re-stock inventory right now, or can it wait until you have more money to go around and buy it in bulk — perhaps even negotiating a discount?

It’s an important exercise for new business owners to make before they buy out of fear. Lack of experience leads to being more susceptible to financial stress when it comes to money management. Think about what matters right now, and don’t invest all at once.

Not Having a Proper Cash Flow Management:

Cash flow is the most important factor that’ll help you achieve your financial goals. But surprisingly, it’s an often overlooked factor, and around 61% of small businesses struggle with it. A big mistake most business owners make is confusing profits with money. Although profits equal money, it’s not the same, especially if you haven’t received it.

Let’s use an example, you’re operating a business making $1000 a day, and your expenses are $700, meaning a net profit of $300 a day. That sounds good, but don’t forget that the time it takes for your clients to pay could be weeks if not more. So you have to make sure you meet the needs of your small business until there, and this is where many small businesses make mistakes, not just new businesses but established ones as well.

Also, if you have money gathering dust in a bank account, this is also an example of poor cash flow management. It’s important to know when to separate your business and personal finances, but having unused money and putting it into expanding or improving your small business or startup is also a good decision. Knowing when to do this will separate you from the competition, as more than 80% of business closures happen due to bad cash flow management.

Your Small Business Doesn’t Have a Legal Structure:

While choosing to pass from a sole proprietorship to an LLC is a big step forward for a business owner — which many think they should only worry about when their business is financially healthy — it’s one of the biggest money mistakes that cost small business owners dearly.

A sole proprietorship comes with many setbacks that business owners tend to ignore. For example, a sole proprietorship will make you solely responsible for your business should you have any legal difficulties. If a potential customer decides to press charges, you’re held personally accountable, and that happens more often than you might think.

It brings difficulties for business funding too. If you default on a business loan, you’re risking your personal assets — with a limited liability company, your personal assets are safe. But before that, you need business funding, which is unlikely because lenders know you’re the sole responsible, and if you end up defaulting on a business loan, they know it’ll bring difficulties for them too.

Not Having a Contingency Plan to Get Funding:

Even if you are on top of your business finances and have a good cash flow, one of the most common financial mistakes business owners make is completely ignoring business financing, and therefore almost guarantee that they can’t get a loan.

Although a good budgeting practice and savings account are essential, a business loan can be the saving grace of many small businesses. The ability to get a life-changing sum for your business can put you on the path of profitability again — and it’s almost impossible for you to save a similar amount. But for that to happen, you need to fit some requirements.

If you don’t have a solid business credit score, cash flow, or business plan, it’s almost impossible to get approved for a loan — and with the current crunch in the economy, even harder to do so. So, make yourself ready for this situation should this need come, and start improving your eligibility standards.

Ignoring Your Business Loan Interest Rates:

Keeping with the thought of the point above, let’s say you finally got approved to have business financing, but now, you have to pay back your business loan — with the interest rates. That extra debt you incur can impact your small business more than you might think — especially when there’s a possibility for them to rise.

If you want to avoid this, it’s best to keep tabs on the money coming out of your business loan repayments and, if possible, get to negotiate a fixed interest rate. Although it’ll increase your repayment terms, you’ll have a clear picture of the money that goes out every month.

A Few Tips for Small Business Owners to Increase the Odds of Avoiding These Financing Mistakes:

Though you learned some of the most common financing mistakes above and got a pretty good idea of how to avoid them, there are some practices for you to take and make sure you stay on top of your finances. Let’s look at a few tips that you can look at:

• Have a Business Plan: If you don’t have a solid idea of where you are going, you can’t reach your destination. The same happens with businesses; you need a roadmap to succeed at every step. To reach your destination, draw a plan to make sure you get there. Make sure you plan for everything — from finances and business practice to budgeting and cash flow.
• Make a Financing Report Every Month: A financial report will help you keep tabs on bookkeeping and ensure you don’t get into any financial trouble — and legal ones too. But you can use this report to see the areas where you could improve. Maybe you’re bleeding too much money into a department that could be allocated to another, more productive one.
• Make Sure Your Bank Accounts Always Have Enough Capital: With this economic climate, it probably won’t surprise you that it can turn against you on a dime — one day, you’re bringing a comfortable net profit, and the next, you’re bringing no money at all. During those dry seasons, you need the means to provide payroll and pay the bills, and you don’t need a business financing option out of despair and the risk of getting into an unfavorable payment position.
• Focus on Developing More Revenue Streams: Keeping with the thought above, you don’t know when the next payment will come, so it’s a good idea to keep striving to get new, potential customers, increase the offers of your small business, expand in other areas, etc. Having a growth mindset will pay dividends when it comes to generating revenue. Think of ideas to expand on your offers, how to put them in front of more potential customers, etc.
• Keep Tabs on Business Lenders: As you’ve seen throughout this article, there are many ways you could be losing money or making a poor financing practice in your business, but one of the poorest is not preparing for business financing. Keep communicating with business lenders, and don’t be afraid to reach out and discuss the potential implementations of one. Also, if you got a loan, it doesn’t mean you should stop talking to them. Keep discussing with lenders about repayment terms, the loan process, etc. You might also be able to renegotiate the loan to a more favorable term.

Avoid One of the Biggest Mistakes Business Owners Make and Be Ready to Receive Funding if You Need It:

With the current banking crisis, getting loans right now is harder than ever — one could say it reminds people of the 2008 financial crisis. Banks keep passing fewer and fewer loans, and small business owners always are on the front end of the stick when the banking system fails.