Last updated on October 28th, 2024 at 12:46 pm

Small Business Looking for Finance? What Not to Do

Securing finance for a small business can be a complex process that requires careful planning, strategic choices, and a good understanding of what lenders and investors look for. However, many small business owners, often new to the financial side of business management, make costly mistakes that can reduce their chances of securing the funding they need. Here’s a breakdown of 10 things that you do not want to do when looking for finance as a small business.

1. Failing to Understand Your Financial Needs and Options

One of the first mistakes small business owners make is jumping into the search for finance without a clear understanding of how much they need and which type of financing best suits their business. Different financial products are suited to various purposes, from startup capital to cash flow management. Without understanding the options available, such as loans, lines of credit, or venture capital, it’s easy to apply for the wrong type, leading to either unsuitable or insufficient financing.

What to Do Instead: Start by assessing how much funding you actually need. Create a detailed budget that includes both startup costs and future operating expenses. Familiarise yourself with different financing options and consider consulting a financial advisor or mentor to help clarify which is best for your business model and growth stage.

2. Rushing the Application Process

Applying for finance is not a process that should be rushed, yet many small business owners approach it hastily, which often leads to incomplete or inaccurate applications. Lenders and investors need comprehensive information about your business, including your financials, credit history, and future projections. Inadequate preparation or lack of attention to detail can cause delays or even lead to rejection.

What to Do Instead: Take the time to prepare a complete application package. This includes gathering key documents like your business plan, cash flow forecasts, balance sheets, and profit and loss statements. Make sure all information is accurate and up-to-date, as any inconsistencies can undermine your credibility.

3. Ignoring or Underestimating Credit Scores

Credit scores are a critical factor for many lenders when assessing the risk of lending to a small business. Both your personal and business credit scores can play a role in securing finance, as lenders may consider your personal financial habits as an indicator of how well you manage your business’s finances. Ignoring or underestimating the impact of poor credit scores can drastically reduce your options and lead to higher interest rates.

What to Do Instead: Before applying for finance, check both your personal and business credit scores. If they’re lower than desired, take steps to improve them, such as paying off outstanding debts or setting up payment reminders to avoid missed payments. Some lenders specialise in lending to businesses with less-than-ideal credit scores, so consider exploring these options as well.

4. Applying for Multiple Loans Simultaneously

It can be tempting to apply for multiple loans at once, hoping to increase your chances of approval. However, this approach can backfire in several ways. Each application generates a hard credit inquiry, which can temporarily lower your credit score. Additionally, lenders may see multiple applications as a sign of financial instability or desperation, which could reduce your appeal as a borrower.

What to Do Instead: Focus on finding the right lender for your needs rather than applying to as many as possible. Research lenders to find those that specialise in your industry or are known for working with small businesses. Apply only to lenders who are likely to approve your application, based on your financial profile and business needs.

5. Neglecting to Have a Clear Business Plan

A solid business plan is essential when applying for finance. This document not only provides a roadmap for your business but also gives lenders and investors insight into your strategy, target market, revenue projections, and long-term viability. Applying for finance without a clear business plan shows a lack of preparation and vision, making it unlikely that lenders or investors will take your business seriously.

What to Do Instead: Develop a comprehensive business plan that includes an executive summary, market analysis, sales and marketing strategies, and detailed financial projections. This will not only help you secure finance but also guide your business decisions moving forward.

6. Overlooking Cash Flow Management

One of the biggest reasons small businesses struggle to secure finance is poor cash flow management. Cash flow demonstrates how well a business can meet its short-term obligations and sustain growth. If your business is cash-strapped or struggling to maintain steady cash flow, lenders may view it as a high risk, even if it’s profitable on paper.

What to Do Instead: Implement robust cash flow management practices, such as regularly reviewing cash inflows and outflows, and forecasting cash flow for upcoming months. Having clear cash flow records can reassure lenders that your business can manage its finances and continue operating effectively.

7. Asking for Too Much or Too Little

Requesting the wrong loan amount can negatively impact your chances of approval. Asking for too much can make lenders wary, as it suggests you may not fully understand your business’s financial needs or may be at risk of overextending. Conversely, asking for too little may indicate a lack of understanding about the true costs of running your business, which could lead to operational or growth challenges later.

What to Do Instead: Base your loan request on your business’s specific needs and future projections, rather than arbitrary figures. Prepare a detailed breakdown of where the funds will be allocated, showing that you’ve carefully considered how much financing is necessary for your business’s objectives.

8. Not Understanding the Terms of the Finance Agreement

Signing a finance agreement without fully understanding the terms and conditions can lead to financial hardship down the line. Many small business owners overlook crucial details such as interest rates, repayment schedules, fees, and penalties for early or late payments. These terms can significantly impact cash flow and profitability if not accounted for correctly.

What to Do Instead: Before accepting any financing, carefully read through the terms and conditions. If there’s something you don’t understand, ask the lender for clarification or consult a financial advisor. Make sure the terms align with your business’s cash flow and repayment capacity, so you’re not caught off-guard by unexpected fees or penalties.

9. Failing to Have a Backup Plan

Some small business owners approach financing as their sole means of survival or growth, without considering alternative solutions if financing falls through. Not every application will be successful, and businesses without backup plans are at greater risk of stagnating or shutting down if their funding doesn’t come through.

What to Do Instead: Develop a contingency plan that includes alternative financing options, such as crowdfunding, invoice financing, or personal investments, if traditional financing isn’t available. Additionally, look for ways to cut costs or improve operational efficiency to reduce the business’s dependence on external finance.

10. Ignoring Potential Investors and Networking Opportunities

While loans are the most common method of financing, ignoring alternative sources like investors or grants can limit your opportunities. Investors, for instance, can provide not just capital but also valuable mentorship and connections. Many small businesses fail to consider investors as a viable financing option, missing out on potentially beneficial partnerships.

What to Do Instead: Attend networking events, join industry associations, and reach out to investors who specialise in your field. Even if you don’t end up securing investment immediately, building a strong network can provide you with future opportunities and insights that may aid in securing finance later on.

Conclusion

When looking for finance as a small business, avoiding these common pitfalls can make the difference between success and failure. With careful preparation, realistic financial planning, and a strategic approach to lenders, you’ll be well-positioned to secure the financing your business needs to grow and thrive. Remember, securing finance isn’t just about the money; it’s also an opportunity to strengthen your business’s credibility, improve cash flow management, and build a sustainable foundation for future success.

As with all finance related posts on this blog, this article doesn’t provice legal advice.  Please check with your professional advisers (accountant for example) if you are at all unsure about the best way to raise finance as every small business is different.