Management & Finance

11 Mistakes to Avoid When Seeking Business Financing

Obtaining funding for your business, whether it’s new or established, can be grueling and frustrating. Success is not a certainty. But you can increase your chances of securing funds if you avoid missteps.

In my experience, here are 11 common mistakes from companies and entrepreneurs who seek financing.

11 Common Financing Mistakes

No business plan. Showing up at a bank without a credible plan will most likely kill your chances of receiving a loan. It shows you haven’t done your homework. Equity investors will want to see one as well. Having a plan also helps communicate long-term goals and your methods to achieve them. A business plan should contain revenue projections and address what you do better than your competitors.

No financial statements. You must submit current financial data. Be honest. You have to account for every dollar that comes in and goes out so that you have a handle on cash flow. Have an accountant, not a bookkeeper, prepare your financial statements and involve that person in your funding search.

Going alone. You need at least one partner. This is someone who, like you, has a financial stake in the business. This person shares in the decision-making and the risk. He or she is someone to brainstorm ideas with and talk you out of the bad ones. Lenders and investors want to see a team or at least one partner because if something happens to you they want to know the business can continue to operate.

Underestimating how much money you need. If investors think you have miscalculated the amount you need to grow, they will not fund you. Remember that there can be fees connected to loans and equity investments. Add them to the amount you request.

Not researching potential funders. Lenders or investors have differing standards and rules. Some equity investors prefer certain industries. Investigate which funding sources are right for your business.

Taking on too much personal debt. Many new entrepreneurs start out by financing their endeavor via personal credit cards, home equity loans, or second mortgages. Others get loans from friends and family. These are sometimes good methods for new business owners to establish a track record to eventually show to potential funders. However, piling up personal debt may harm your credit score, something lenders look at when reviewing a loan application. And you should know your credit score before approaching lenders or investors.

Unsure of how to use the money. Both banks and investors want the money they inject into your company to be used to increase revenue, so they can be paid back. Have a clear plan as to how you will use their money to achieve this goal.

Skimping on marketing and sales. Potential lenders and equity investors both want to see momentum — a steady rise in sales. If you don’t allocate enough resources for marketing and advertising at the outset, your revenue will stall. That will severely harm your chances of attracting any type of financing.

Not hiring enough personnel. If your business requires a salesperson, hire one at the outset. You need to start out strong and show that your product or service has a demand and momentum.

Taking the wrong kind financing. If you seek control over decision-making for your business, equity investment is not for you. Equity investors will want a role in how your business is run. If you can’t live with that, debt is a better choice; lenders leave the business operations to you.

Waiting too long to obtain outside funding. If you need to increase the number of employees, physical space, marketing, or inventory, do it quickly. Otherwise, your revenue may decline, which makes your company less attractive later to lenders or investors. A business checking account with a low balance is a red flag for banks.

Funding Sources

Most businesses that want to grow will need outside funding at some point. Keep that in mind when determining how much personal debt to take on in the early stages of operation.

Many more funding choices exist now versus just 10 years ago. This is due, in part, to the merging of technology and finance. Online lenders and equity crowdfunding portals that attract individuals who could never invest before are two non-traditional options. With adequate preparation and a good credit rating, you should be able to secure financing that best meets your requirements.

Marcia Kaplan

Marcia Kaplan

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