Financing your business effectively can mean the difference between success and liquidation. It’s vital that you utilize the right sources of business finance such as business loans or other forms of alternative finance at the right time – and avoid falling into some all too common traps. So where do many businesses go wrong?
1. Negotiating poorly.
Business finance isn’t easy to find, but that doesn’t mean that there won’t be lenders competing for your business. On that basis, you should consult multiple lenders before making a final decision, and negotiate calmly but assertively when presented with a proposition. Rarely will a lender inform you that their first offer is the only deal available, and nine times out of ten negotiations will produce better interest rates and more favourable repayment terms. This advice remains true even if you have a compromised credit history or are operating a start-up business without a track record.
2. Relying on credit cards.
A recent survey in the US found that around one in ten companies there relied on personal and business credit cards for business finance. For sure, credit cards are very convenient and highly flexible, but precisely because of these factors they tend to attract very high interest rates. What’s more, whilst credit card borrowing is unsecured, some small business owners are required to sign a personal guarantee for their business credit cards. This puts their personal assets at risk in the event of a default and can easily compromise their personal credit score. Be very careful about signing such a guarantee, and never use credit cards for business finance unless extensive negotiation has failed to produce a cheaper alternative.
3. Blurring business and personal finances.
Many businesses, especially start-ups, are financed by personal and family savings. This is often not the best choice of business finance. By keeping your personal and business finances separate, you can avoid personal liability if the business fails – particularly important as a significant percentage of new businesses do not survive their first year. In addition, using personal finances in this way means that your business will not build its own credit score, leading to problems down the line when you wish to borrow.
4. Failing to plan ahead.
If you want to gain business finance from a bank or other investor, you will need to demonstrate a clear business plan and indicate how you intend to use the money. The lender may also wish to see profit and loss statements, balance sheets and indications of your cash flow, along with proof that you are up to date with VAT and tax payments. If you don’t have this information to hand, you may need to arrange a further appointment and may lessen your chances of acceptance if the lender believes you are disorganized.
5. Not reading the small print.
The headline interest rate is only part of the cost of a loan – there may be significant business finance arrangement fees as well, in addition to some nasty penalties for early repayment buried in the small print. Be absolutely sure that you understand all the terms and conditions before committing to any financial agreement, and carefully calculate all the interest, fees and charges. Equally importantly, as charges are levied you should make sure that they conform to the agreement and immediately challenge any which appear to be wrong.
6. Assuming you’ll always have an overdraft.
Many businesses rely heavily on their overdrafts for their business finance, but it’s dangerous to assume that this facility will always be at hand. In fact, research shows that small businesses in the UK are losing bank overdrafts at the rate of £5.7 million a day, totalling a reduction of £5 billion since 2011. Responses to a recent survey indicated that 17% of SMEs had lost their overdrafts altogether, whilst a further 30% had seen their limits reduced, with companies in the north suffering twice as much as their London-based counterparts. If you are lucky enough to have a substantial overdraft, do not assume that this business finance will always be available – and put effective contingency plans in place.
7. Ignoring alternative lenders.
Whilst most companies use their bank as their primary source of finance, they ignore alternative lenders at their peril. Alternative lenders, such as Cashsolv, have different lending criteria from banks and are often able to assist your business finance when banks refuse to do so. They can also offer different and more flexible ways of borrowing, including emergency loans (which can deliver finance in less than 24 hours), asset-based finance (where you borrow against the value of your plant, premises or equipment) and invoice factoring and discounting (where you can borrow up to 85% of the value of your invoices the moment you issue them, with repayment being made when your customers pay you).
These mistakes are all easy to make, but thankfully they’re all easy to avoid. Steer clear of these pitfalls and you will give yourself the best possible chance of staying in business.
As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl continues an ethos of working with distressed businesses to help them overcome their financial problems.