7 Critical Business Financing Mistakes

Avoiding the top 7 financing mistakes is a key component in survival.

If you start committing these financing mistakes too often, you will greatly reduce any chance you have for longer term success.

The key is to understand the causes and significance of each so that you’re in a position to make better decisions.

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

Regardless of the size of your , inaccurate record keeping creates all sorts of issues relating to cash flow, planning, and decision making.

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

And 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 activity.

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

>>> Financing Mistakes (2) – No ed Cash Flow.

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

Without keeping score, es tend to stray further and further away from their s and wait for a crisis that forces a change in monthly spending habits.

Even if you have a ed cash flow, it needs to be realistic.

A certain level of conservatism needs to be present, or it will become meaningless in very short order.

>>> Financing Mistakes (3) – Inadequate

No amount of record keeping will help you if you don’t have enough to properly operate the .

That’s why its important to accurately create a cash flow forecast before you even start up, acquire, or expand a .

Too often the component is completely ignored with the primary focus going towards capital asset investments.

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

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

Unless you have meaningful , forecasting, and bookkeeping in place, you’re likely going to 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.

I mean, 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 s are government remittances, trade payables, and credit card payments.

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

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

First, late payments of credit cards are probably the most common ways in which both es and destroy their credit.

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

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

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

It gets worse.

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

This can cause two additional problems.

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

Second, lenders tend to be less willing to grant credit to a that has a multitude of inquiries on its credit report.

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

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

For startups, the most important thing you can do from a financing point of view is get profitable as fast as possible.

Most lenders must see at least one year of profitable before they will consider lending funds based on the strength of the .

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

For existing es, historical results need to show profitability to acquire additional capital.

The measurement of this ability to repay is based on the net income recorded for the by a third party accredited accountant.

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

>>> Financing Mistakes (7) – No Financing Strategy

A proper financing strategy creates 1) the financing required to support the present and future cash flows of the , 2) the debt repayment schedule that the cash flow can service, and 3) the contingency funding necessary to address unplanned or unique needs.

This sounds good in principle, but does not tend to be well practiced.

Why?

Because financing is largely an unplanned and after the fact event.

It seems once everything else is figured out, then a will try to locate financing.

There are many reasons for this including: entrepreneurs are more marketing oriented, people believe financing is easy to secure when they need it, the short term impact of putting off financial issues are not as immediate as other things, and so on.

Regardless of the reason, the lack of a workable financing strategy is indeed a mistake.

However, a meaningful financing strategy is not likely to exist if one or more of the other 6 mistakes are present.

This reinforces the point that all mistakes listed are intertwined and when more than one is made, the effect of the negative result can become compounded.

Further reading:

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