April 18, 2023 | Last Updated on: August 23, 2024
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.
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.
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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.
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.
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.
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.
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.
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.
Another great way to get financing is with alternative lenders like Biz2Credit. With us, you don’t need the eligibility standards that banks demand, nor do you need to wait weeks to see it approved — let alone have it in your bank account. Check out our loan offerings here.
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.
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:
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.
So, if you need business funding, another great solution is with Biz2Credit. Here, you can be sure you’ll have an easier time getting approved — and much faster than traditional systems. We have worked with hundreds of small businesses and know the difficulties you’re experiencing right now, so you be sure we’ll not strain your business finances with unsustainable repayment terms! Reach out to our small business funding specialist and know the best course of action for you and your small business today.
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