Seeking financing for your business can be tricky. While there are multiple avenues you could go down to find funding, that’s not to say all of them are the best option for your business. If you’re not careful, many could lead to you shutting your doors. That’s why we’re offering a few helpful tips on what to avoid.
A huge mistake a lot of entrepreneurs make when financing their business is using personal credit. Not only will this leave you footing a pretty significant bill if things go south, but you’ll also have to pay steep interest rates. According to the SBA, 46 percent of small businesses use personal credit cards for funding, which can be a slippery slope.
With credit cards, the biggest thing you need to worry about is your ability to pay the card off every month. Responsible use of a personal credit card for business would be reimbursing yourself for gas or lodging if you travel for work; those are easily itemized and come with little to no interest (assuming you pay on time). Business owners accrue an average of around $195,000 in debt, and taking the risk of paying high interest on personal lines of credit is not worth it.
A Lack of Collateral or Liquidation
A lot of businesses need a significant amount of capital. Even novice business owners can obtain significant funding, but a key consideration when seeking it is just how much collateral or liquidation you can put against it. For example, the average restaurant startup cost for equipment is around $115,655, which if the restaurant fails, then the equipment can be resold to get back some of the money.
When creating a list of items requiring financing, it’s smart to itemize the total amount of each item/equipment, as well as possibly the shelf-life. Furthermore, if you’re looking to take out a loan, then putting forth something valuable as collateral can be a smart move, just as long as you pay everything back to avoid the item being repossessed. The more clearly defined value an asset has, the better chances you’ll have in receiving funding.
We’ve all seen loans come in the mail telling us we’ve been pre-approved for thousands of dollars, and many of those are predatory lending traps. These are lenders that target people with poor credit and coax them into signing loans with high-interest rates and fees. Predatory lending is notorious for tanking businesses, which is why you need to be careful about your resources and how much you’re borrowing.
Poor Cash Flow
A big reason people don’t get approved for financing is that they don’t have the cash flow necessary to get approved. Not only is this a big reason entrepreneurs don’t get loans, but it’s also why 82 percent of businesses fail. A lot of people think business financing is for when you’re performing poorly, but that’s not the case. In fact, lenders prefer deals with a strongly performing business.
Let’s say that you’re a cafe looking to buy a new espresso machine to handle more volume. An espresso machine is a pretty expensive piece of equipment, but the resale value is stable, so lenders may be willing to invest even though your cash flow has been limited. While you may be able to get the loan by highlighting the spike in sales you’ve had for espresso drinks, you would’ve gotten a more favorable rate if there was more cash flow. The general rule of thumb is the more you can showcase your ability to pay, the more likely it is that you’ll be approved.
Not Proving Market Value
Finally, lenders want to believe in the long-term life of your business. A significant part of doing this is proving your market value. Not having adequate market value is a big reason nearly 42 percent of businesses fail, so you need to establish market value quickly.
The ideal situation for financing is for expansion. Try to avoid situations in which you’re recovering from or compensating for bad decisions, as those won’t lead to favorable lending terms.
What are some business financing obstacles you’ve had to confront?
If you have any questions regarding growth strategies for your small business, don’t hesitate to reach out to our specialists at Currency. We’re always available for a call at 877-358-4595, and would love to answer your questions and guide you toward the best option for your business.