Very few people in this world are lucky enough to be able to start a business without any outside financial help. Sure there are those young startup founders who sprang from the loins of independently wealthy parents, or serial entrepreneurs who are on their third or fourth business with plenty of proceeds from previous ventures to throw around. But these make up a very small percentage of the business owning demographic in the United States.
So how does one go about getting a business off the ground when you don’t have piles of money to throw at a potentially risky venture? In most cases, people opt for small business loans. The only problem is that the average new entrepreneur is only familiar with auto loans and possibly a home mortgage, both of which work very differently than a small business loan.
Keep reading to learn more about some common mistakes new business owners make when deciding how to finance their business opening or expansion. Then contact The Commercial Finance Group’s Atlanta office to find out how we can help you avoid these faux pas through asset-based lending and other custom lending solutions!
Why Do Small Businesses Need Lending Options?
Competition is healthy for any market. When you only have one or two options to choose from for a particular good or service, neither of those companies need to work very hard to earn your business. They can rest easy in the knowledge that if you need what they’re offering, there’s a 50/50 chance that you’ll choose them.
Banks used to be the only option when it came to small business loans, meaning that if you needed money to start or grow your business, you had to fit the bank’s narrow definition of a worthy borrower and be willing to agree to a fairly static set of terms. See our blog post on “Why Small Business Lending Isn’t What It Used To Be” for more on this topic.
These days, thankfully, the lending landscape has changed. Although banks are still fairly rigid, offering mostly long-term commercial loans, there are now other options in the financial industry. The Commercial Finance Group is proud to be a part of this revolution, offering asset-based lending, receivables financing, and other short-term options that can provide a solution for companies deemed “unbankable.”
Common Small Business Loan Mistakes
- Choosing The Wrong Type Of Loan – The type of loan that you accept should depend on your current financial health, the length of time you have to wait for funding, and what you plan on doing with the money. “There are over 44 different types of financing available to small business owners, and not every one of them is right for each situation,” says Gerri Detweiler, head of market education at Nav told the NFIB. “The wrong loan can devastate your firm’s finances, so it’s worth taking some time to make sure you understand what will work best for your current situation.”
- Borrowing For The Wrong Reasons – Debt is always a liability, even though there are some types of debt that will help you to establish a strong credit history. That being said, debt is often a necessity of running a business. Before adding another liability to your balance sheet, however, you should make sure that you’re doing it for the right reasons. A long-term loan isn’t the right way to find relief from cash flow problems, and other options, such as asset-based lending, can be a much better fit for certain situations.
- Not Understanding Loan Costs – Small business lenders aren’t necessarily required to disclose all of the information that’s required by law for a consumer loan. Without a proper understanding of what the loan is going to cost you over its lifespan could put the long-term financial health of your business at risk.
- Relying On Credit Cards – With all of these important issues to consider when taking out a business loan, some entrepreneurs prefer to avoid the process altogether by financing business needs out of pocket, namely through credit cards. While it may feel more comfortable in the short-term, it’s actually a very bad decision for your long-term business goals.
“Maxing out your credit limit is a bad idea if you hope to continue to get business financing. Piling up big expenses on your personal or business credit cards only leads to high interest payments,” explains Tammie Rimon on LinkedIn. “And not being able to pay back your credit card bills will only serve to damage your personal and business credit score. That’s going to make it very difficult to ever find a real loan.”
- Getting A Loan When You Don’t Need One – In previous posts, we’ve detailed some of the causes of cash flow problems for a business as well as signs that your cash flow strategies aren’t as robust as they should be. In many of these cases, actually lack of money isn’t really the problem. It’s how money is being managed inside the business itself. Getting a loan when what you actually need is to overhaul your operational procedures is only putting a bandaid on a bullet hole.
If you’d like to be able to avoid some of these common small business mistakes, contact The Financial Group’s office in Atlanta today. We’ve helped entrepreneurs all over the Southeast (in addition to the rest of America) find custom lending solutions that meet their needs better than traditional loans for small business. Ask us about asset-based lending and receivables financing today!
