If you are an entrepreneur or small-business owner, then statistics suggest that either now or as you attempt to grow, you will need some business financing. People focus most of their efforts on “getting financing.” Of course that is important, but we also need to learn from the mistakes of others.
Growing a business is about failures. You will fail. The question is, will you throw in the towel and give up, or will you learn from those failures and get better and continue?
So let’s look at the 4 biggest financing mistakes that are being made by entrepreneurs.
- Using personal credit cards instead of business credit cards – using personal credit cards to fund your business can be very risky. It violates the first rule of borrowing money the right way, in that you are not separating your personal and business credit. Statistically, about 80% of small-business owners use credit cards as a financing tool. Although not all business credit cards are created equal, many of them do not report the monthly activity to your personal credit. That’s day 1 of Business Borrowing 101.
- Not treating your personal credit as an asset – this one is about basic math. Debt financing is always less costly than equity financing, so it would be wise to position yourself to have as many business borrowing options as possible. Then you learn that the lowest-cost debt options come from banks, and require a good business credit profile. Add all that together, and the concept of treating your credit as an asset is no longer just a nice thing: it becomes important, wise, and essential. Keep in mind that your personal credit is either an asset or a liability. If it’s an asset, then do you clearly know how to keep it that way as you borrow money? If your credit is a liability, then are you taking the right steps to turn it into an asset?
- Spending capital ineffectively – if you are fortunate enough to obtain financing, and you end up spending it ineffectively, then you are at risk of a bad exchange that leaves you with nothing more than additional debt. It would be wise to use any financing you obtain towards revenue-generating activities that will result in leads and sales for your business.
- Not having a plan – the old saying goes “if you fail to plan, you plan to fail.” That reigns true now as much as it did when it was first stated years ago. Improper planning can contribute to issues such as undercapitalization. If you plan properly, you will know what is needed to get the business off the ground. This includes supplies, equipment, and funding for purchases that will contribute to your company’s bottom line. With that being said, I recommend Les McKeown’s formula. Les has started over 40 companies and is the author of Predictable Success. His suggestion is to do all this, to look at every possible angle, and to make all the projections for how much financing you need, so you can be confident about what you need. Then when you’ve done all that, triple it. So you can say he’s crazy or you can listen to an expert who has done it over and over and over again, and has written a best-selling book to boot.
We all know that the goal is to use your financing to grow your business, and to realize the success that you have dreamed about. That is all well and good. However, since 80% of businesses fail within the first 5 years, you may want to learn from the mistakes of others. There are plenty of other land mines out there. Don’t let these common mistakes get you trapped and stall the progress of your business.