Are you making these common small business funding mistakes?
The process of funding your business is a very delicate one, as it can make or mar your business.
In fact, many thriving businesses have gone into extinction as a result of funding-related mistakes, and this is why you need to avoid repeating such mistakes so as not to follow suit.
Without any hesitation, let’s get started!
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Mistakes to Avoid When Funding Your Business
Here are some of the grievous financial fundraising blunders and how to avoid them:
Overestimating future revenue
It’s much easier to overestimate the amount your business is likely to generate in the next accounting period using historical data. You may even be extremely glad to present the impressive figure to your creditors to convince them to borrow the needed funds.
However, you must be very careful when estimating your future revenue, as several variables could alter your forecast. You must always remember that a poor forecast can mar your business’s financial health when it’s time to repay the loan.
Raising money too early or too late
Yes, I understand that your business needs money to survive, but never be too quick or late to raise money for your business. Here’s the reason:
When you fund your business too early, you may lose a substantial amount or entire money.
For example, suppose your startup is still in its early stage, and you decide to start spending on expensive machines just because you see other firms doing so. In that case, that singular decision may affect your business’s financial health since you are spending high despite your limited funds.
Not having expert counsel
The fact that you own your business does not necessarily mean you must be the only one making every decision in the organization; several decisions require great expertise, of which finances are a part.
Before deciding to fund your business, you need to first seek counsel from financial experts so that they can advise you on the best course of action based on their experience.
When the experts assess what appears good to you may not be ideal at all. Therefore, never fund your business until you get a satisfactory direction from the experts. Otherwise, you may lose the entire funds.
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No clear funding objectives
When trying to invest some funds into your business, you must clarify the exact amount needed to achieve the goal at hand.
As simple as this may sound, many businesses have fallen victim and are nowhere to be found again today.
The best way to prevent such a horrible experience is to first figure out the exact amount you need and why you need it and ruminate on how to make the most of the funds.
Underestimating your variable expenses
Although there’s no way you can accurately account for all your variable expenses, it is very essential to pinpoint the key variables and factor them in, while making your calculations.
Doing so helps you to have a complete grasp of your total costs and enables you to take steps to mitigate any risks that may arise.
Forgetting about hidden fees
Business loans, in most cases, contain certain hidden fees, including origination fees, contract fees, application fees, administrative fees, etc. The mistake most business owners make is that they don’t consider these fees before finally obtaining the loans.
Borrowing funds with several hidden fees means you will get a lesser amount and still pay more. This is not favorable at all, and it can even affect your business’s financial health.
Therefore, make sure you understand the basic terms and hidden fees associated with the loan you intend to borrow before making a final agreement.
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Not using GAAP (Generally Accepted Accounting Principles)
This is yet another mistake to avoid when funding any business. When there is no proper tracking of the cash flowing in or going out of the business, certainly, such a business will soon collapse.
Adopting GAAP standards will provide you with more reliable accounting information, which is vital for making informed and sound financial decisions.
GAAP statements are also useful to investors as they will be able to make optimal investment decisions.
You can hire any reliable accounting firm to help you with these standards.
Stacking your business loans
Loan stacking is when a business owner sources multiple loans at once. You must avoid this grievous mistake to protect your business from “financial leprosy.”
Sourcing loan from multiple sources is not a good idea as it may negatively affect your business.
For instance, assuming your business owes some creditors and you decide to obtain loans from different sources to pay the existing creditors.
This is not a great move because your debt will only be accruing, and your business may collapse if care is not taken.
Rather than sourcing loans from multiple sources, you can evaluate the available finance sources and select the most optimal alternative.
Wrapping It Up
Now that you’ve identified some of the Mistakes To Avoid When Funding Your Business, which of these blunders have you ever committed, and what was the effect on your business?
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