If you are a new entrepreneur in need of startup business financing, it's important to know the three biggest small business financing mistakes made by entrepreneurs in their first 1-2 years. Knowing and understanding these mistakes will empower you to make the right decisions. The small business financing world can be complicated and confusing for entrepreneurs and small business owners. It has not only changed dramatically since The Great Recession but it's a daunting terrain that is constantly changing.
Most new entrepreneurs are often "solopreneurs" that have one or two employees, including themselves. According to statistics complied by Clate Mask, approximately 83% of small business owners are solopreneurs. The three biggest startup business financing mistakes made by new entrepreneurs are often made by solopreneurs and the information outlined here will be particularly beneficial for this group of people (specifically those who are seeking debt financing). So for all of the solopreneurs out there, what are the three biggest startup business financing mistakes that you make?
Mistake #1: Not knowing what small business financing options are available
Most solopreneurs have no idea what small business financing options are available to someone in their unique situation. They often assume they can qualify for one type of financing when another type of financing may be a better fit for them. For example, I recently had someone contact me saying they wanted to start a business and they were looking to "borrow $50k and to repay back in 10 years." These were their exact words. I was impressed that they knew exactly what they needed and how long it would take them to pay it back but I know that there is no guarantee that they'll get exactly what they need from a lender.
I had to explain that at this stage in their business, their personal credit history will most likely determine what they can obtain from a lender. If they have well established and maintained credit, they could very well qualify for credit card financing and get the $50k they need. According to a report compiled by Keybridge Research, the use of business credit cards amongst entrepreneurs contributed to $142 billion being pumped into the economy between 2003 and 2008. Those numbers say a lot about the number of entrepreneurs who qualify for and use business credit cards to finance their business.
However, one with less than perfect credit will most likely not be able to qualify for business credit card financing. Many entrepreneurs who have less than perfect credit can qualify for an SBA microloan, since SBA microlenders tend to have less stringent credit criteria. According to an article written by Community Moderator, Caron Beesley for the SBA.gov website, SBA microloans are typically offered by local community based, nonprofit microfinance organizations. These organizations tend to focus on lending to individuals who live in rural or disadvantaged communities with poor credit and low cash reserves. Microloans can go up to $50,000 however the average loan awarded is about $13,000. You can find out how to apply for a microloan by contacting your local SBA district office here.
Mistake #2: Not properly preparing yourself to be approved
The key to getting approved for small business financing is knowing what lenders expect of you. All lenders have a set list of qualifying criteria you must meet in order to borrow money from them. If you don't know and understand what that criterion is, you won't be properly prepared to get approved. As stated earlier, as a new entrepreneur, most lenders are most likely going to check your personal credit history to determine if you are creditworthy enough to borrow money for your business. There's simply no way around this when seeking debt financing. Therefore, it would be wise to start treating your credit like an asset if you haven't already.
What is treating your credit like an asset? It's protecting and preserving your credit so when you're ready to apply for small business financing, you have a better chance at getting approved. You can protect and preserve your credit by only taking on debt that you can afford to pay back (living within or below your means) and making timely payments on any credit accounts that you accumulate (this includes personal credit cards, medical bills, rent or mortgages, etc). For some, this may sound difficult or even unrealistic but if you are well disciplined in regards to your spending habits, it can be achieved. It's something worth working on, especially if you plan on applying for any type of small business financing for your new venture.
Mistake #3: Trying to obtain small business financing without seeking the help of an expert
You can choose to work with any one of the hundreds or even thousands of small business financing experts when you are in the market for some funding. According to last month's Biz2Credit lending index, the big banks only approved 17.6% of the loan applications they received from small business owners. What's worse is that this is a record!!! That's higher than normal. So almost 83% are denied.
If this is not enough to convince you that professional help might be wise then consider this further. Of the 17% who were approved, many of them received less than they requested- so the index doesn't track if those small businesses got what they needed but only if they got approved. What if I requested $100,000 and I got "approved" for $10,000? Well, you're part of the 17% who were "successful." Then there's the collateral part. What about those people who got their $100,000 they needed by pledging their home as collateral? What if that same person could have gone to a different bank and got the same $100,000 without pledging their home as collateral?
Those are just a few ways to look at the discussion about working with a business finance professional. If you try obtain funding on your own and don't get what you were looking for then you may want to consider working with someone who has relationships from both bank and non-bank lenders.
These are 3 very common startup business financing mistakes. Tell us what you think about them and if you have a Top 3 or Top 5 then tell us what we missed!
(image via freedigitalphotos.net)