Finance

Critical Business Financing Mistakes

Avoiding the top 7 business financing mistakes is key to business survival.

If you commit these business financing mistakes too often, you will greatly reduce your chance of longer-term business success.

The key is to understand the causes and significance of each so that you can make better decisions.

7 Critical Business Financing Mistakes - REDMAC

>>> Business Financing Mistakes (1) – No Monthly Bookkeeping.

Regardless of your business’s size, inaccurate record-keeping creates issues relating to cash flow, planning, and business decision-making.

While everything has a cost, bookkeeping services are dirt cheap compared to most other costs a business will incur.

Once a bookkeeping process gets established, the cost usually goes down or becomes more cost-effective as there is no wasted effort in recording all the business activity.

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By itself, this one mistake tends to lead to all the others in one way or another and should be avoided at all costs.

>>> Business Financing Mistakes (2) – No Projected Cash Flow.

No meaningful bookkeeping creates a lack of knowing where you’ve been. No projected cash flow creates a lack of knowing where you’re going.

Without keeping score, businesses tend to stray further and further away from their targets and wait for a crisis that changes monthly spending habits.

Even if you have a projected cash flow, it must be realistic.

A certain level of conservatism must be present, or it will become meaningless in concise order.

>>> Business Financing Mistakes (3) – Inadequate Working Capital

No record-keeping will help you if you don’t have enough working capital to operate the business properly.

That’s why it is important to accurately create a cash flow forecast before starting, acquiring, or expanding a business.

The working capital component is often completely ignored, with the primary focus on capital asset investments.

When this happens, the cash flow crunch is usually felt quickly as insufficient funds to properly manage through the normal sales cycle.

>>> Business Financing Mistakes (4) – Poor Payment Management.

Unless you have meaningful working capital, forecasting, and bookkeeping, you’ll likely have cash management problems.

The result is the need to stretch out and defer payments that have come due.

This can be the very edge of the slippery slope.

If you don’t find out what’s causing the cash flow problem in the first place, stretching out payments may only help you dig a deeper hole.

The primary targets are government remittances, trade payables, and credit card payments.

>>> Business Financing Mistakes (5) – Poor Credit Management

There can be severe credit consequences to deferring payments for both short periods and indefinite periods.

First, the late payments of credit cards are probably the most common ways businesses and individuals destroy their credit.

Second, NSF checks are also recorded through business credit reports and are another black mark.

Third, if you put off a payment too long, a creditor could file a judgment against you, further damaging your credit.

Fourth, when you apply for future credit, being behind with government payments can result in many lenders’ automatic turndown.

It gets worse.

When you apply for credit, credit inquiries are listed on your credit report.

This can cause two additional problems.

First, multiple inquiries can reduce your overall credit rating or score.

Second, lenders tend to be less willing to grant credit to a business with many inquiries on its credit report.

If you get into situations where you’re short cash for a finite period, proactively discuss your creditors’ situation and negotiate repayment arrangements that you can both live with. That won’t jeopardize your credit.

>>> Business Financing Mistakes (6) – No Recorded Profitability

The most important thing you can do from a financing point of view is to get profitable as fast as possible for startups.

Most lenders must see at least one year of profitable financial statements before considering lending funds based on the business’s strength.

Before short-term profitability is demonstrated, business financing is based primarily on personal credit and net worth.

For existing businesses, historical results must show profitability to acquire additional capital.

This ability to repay is measured based on the net income recorded for the business by a third-party accredited accountant.

In many cases, businesses work with their accountants to reduce business tax as much as possible but also destroy or restrict their ability to borrow when the business net income is insufficient to service any additional debt.

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