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Credit can fuel your business growth, but do not fall into the trap of these 5 financing mistakes

Credit can fuel your business growth, but do not fall into the trap of these 5 financing mistakes

Most businesses fail, not because of anything else but poor financial decisions

Keeping your business afloat requires more than just passion. Being in love with your business doesn’t guarantee success; you need more than that. Most businesses fail, not because of anything else but poor financial decisions.

Seeking finances for your business is a big decision — one that can make or break your enterprise. Managing these funds is even a greater and more important task. The truth is, you do not want to make certain financial mistakes with far-reaching implications. For someone who is well educated on the various financial options and their possible implications, avoiding unnecessary pitfalls is easier. So what are some the mistakes you need to steer clear of?

Also read: Venture debt is a viable alternative to VC funding, and it is getting hotter in Southeast Asia

Integrating personal and business finances

For most entrepreneurs starting businesses, one of the most common sources of initial capital is personal savings. It is easy for entrepreneurs to get hold of this money and use it in fuelling their businesses, even at later stages. Mixing finances comes with several challenges. The obvious limitation is that of disorganisation. You won’t be able to track your budget as accurately as you might have wanted to. Yet again, tracing profits and losses might prove difficult for an investor who mixes personal and business finances.

Consider someone who borrows money to finance his business using his personal account. You might end up taking a hit on your personal credit score or damaging your reputation. It also comes with the disadvantage of not allowing your business to have its own credit history. Unless you do not have plans for future financing, a credit history for any business is important. Whenever possible, try to consider your business and personal finances as separate entities. You will appreciate it.

Overlooking fees and charges

For some business owners, what matters most is getting the credit when they need it most. They only think about the associated charges and interest rates when they start paying the loans. When seeking loans and other forms of credit, it is advisable to read the finer details of the agreement, especially those pertaining to fees. Do not just concentrate on the interest rates. Be keen to find out the service charges, application charges, and special fees where they apply in order to avoid unnecessary surprises.

In some cases, you might find some fees being rolled into the principal of your loan. Subsequently, you end up paying more interest rates than was necessary. Spot such anomalies when applying for loans and have them addressed immediately.

Also read: 7 essential legal tips for startup founders

One of the worst mistakes someone can ever do in the financial world is failing to negotiate. You don’t need to snatch the first financing offer that comes to you. Instead, you should take your time to consider several choices, including shopping around for lower interest rates. To negotiate better deals, you need information, so approach financial institutions and lending firms with your options clearly laid out, only taking what works in your favour.

Failing to plan

Proper planning or lack of it can make or break your business. When it comes to financing your business, you need to have every detail in writing. Consider several aspects of financial decisions before making up your mind. It is also important to have a clear set of objectives for your business. Why do you need the money? How do you plan to use it? How will the money foster the growth of your business?

Have an itemised list of your plans for the money. Budget everything up to the last cent. Banks and lending institutions at times require business proposals and plans on how you have purposed to use the money. You might find it difficult to draft this if you do not have a clear spending plan.

The limitations of lack of proper planning don’t just stop at accessing the loans. Even if you are lucky enough to secure it, you might have difficulties managing it. You might end up spending the money on things that are not related to your business. Never take a loan when you don’t have plans of boosting your business because it is not worth it.

Heavily relying on credit cards

According to a recent survey by the U.S Census Bureau, more than 10 per cent of business financing comes from credit cards, both personal and business. It isn’t entirely wrong to use your business credit card to boost your enterprise. In fact, you end up establishing a good credit score for your business. However, it becomes a problem when you heavily rely on credit card debt for your funding. It is a poor choice of financing. The high interest rates and annual fees associated with these loans can hurt the profits of your business.

During the early stages of a company, many entrepreneurs find themselves signing personal guarantees for their business credit cards. This in turn puts their personal assets at risk. In case your business defaults in making payments, your personal credit score will suffer. If you choose to go for this, be sure to negotiate the exclusion of some of your personal assets from such guarantees.

Also read: Emergence of venture debt in Southeast Asia

Avoiding debt at the expense of growth

After all that has been said about loans and their interest rates, you are probably thinking that taking a loan isn’t such a good idea after all. Well, you might be wrong on this one. Several businesses have prospered on loans. All you need to know is how to manage the money. If you get good creditors you are unlikely to have any problem repaying your loans. Don’t limit your business to the funds available to you. Do your research and find worthy lenders instead of being averse to taking loans. What matters most is the growth and ultimate success of your business.

Keeping your business up and running might itself prove an uphill task. For an informed individual however, you will find it easier to handle major financial decisions and debt issues. Just be sure not to make the same mistakes that have cost some businesses nearly everything.

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