19 Business Funding Mistakes To Avoid

Alex Molloy

Wednesday, 10 August 2016

During the process of obtaining finance for your small business, it’s easy to make mistakes. It can be a long process and the lender may request a lot of information in order to make a decision, but there are some simple tips and tricks you can use to stay organised and in control of the process. It doesn’t have to be stressful if you prepare ahead of time and prep yourself to deal with curveballs!

Here are 19 mistakes we’ve seen over the years, to help you steer clear of making them yourself:

1. Pay attention to detail

When applying for and obtaining a loan for your business, it’s crucial that you read your letter of offer to find out exactly what you are liable for. Surprises can happen at any time during the term of the loan, so make sure you’re across any risks right from the start.

If you feel more comfortable, you might want to seek advice from a trusted accountant or lawyer.

2. Be precise when discussing your business vision

You need to be very clear about where you see the business going. If it’s ambiguous, it will be very difficult to communicate your vision convincingly to the lender.

3. Clearly indicate how the money will be used

This is really part of your business vision and being able to articulate it. If you are unclear about how the money is going to be used, then you’re not building trust with the lender and they’re unlikely to fund your vision.

4. Demonstrate how the business will make money

You need to clearly demonstrate how your business will make enough money to pay back the loan. If you don’t have a firm grip on this then you’re unlikely to secure the funding you need.

5. Understand when it’s time to take out a business loan

This is all about understanding the difference between what you want and what you need.

Business loans should only be considered when you feel that it is something your business absolutely needs in order to grow. These loans can work well when you want to buy extra equipment or expand your business, however business funding is generally not suitable if it’s just for the purpose of having extra cash on hand.

If you want to use that cash to grow the business, it’s a different story, but you’ll need to articulate this very carefully so that the lender understands where the additional cash will be driving growth and delivering value back to the business.

6. Understand the true cost of the loan

When seeking business funding, you need to understand the ‘true cost’ of the loan so that you can plan ahead.

Sometimes there can be application fees, early repayment fees, and other hidden charges. Other times there are no fees at all. Every lender has its own set of lending criteria and fee structure. Having this information upfront will help you calculate whether you can really afford the loan.

7. Be aware of the interest rate

A loan can be great for your business, allowing it to expand, strengthen and grow. However, make sure you know what the loan will cost you in its entirety. This will help you understand if you’ll be able to repay the loan in time.

8. Be prepared for the future

Have you formalised your plan? How are you going to keep yourself accountable? Will the money be used upfront, or gradually over time, and why? What changes might occur over the course of the loan? What is going to get the best results for your business?

9. Have a repayment plan

Be prepared with your repayment plan at the outset, whether it involves putting aside money every month or repaying it in one sweep following a major business event.

10. Make business management a priority

We know you’re focused on making your business a success, but are you demonstrating your expertise to the lender?

Make sure you show that you’re managing your business in an organised and professional manner. You might do this by showing that your accounting is up-to-date, or demonstrating that you are on top of your debts.

11. Don’t fear rejection

Putting your business’ financials and your management expertise on show can be a very uncomfortable experience, and understandably you might be nervous about being rejected by a particular lender.

Don’t let it stand in the way of you applying for funding. When you talk to experts in the space, such as the credit specialist team at Valiant, you’ll see that there are so many options available and each lender has different criteria.

Being rejected by a lender isn’t a reflection of your business, but rather an indicator that a particular type of finance might not be the perfect fit. Don’t give up!

12. Don’t overextend yourself

It can be easy to fall into the trap of overextending yourself, but we recommend never borrowing more than you need.

“Isn’t it better to be safe than sorry?”

Sure, it’s always a good idea to be safe, but do you want to pay interest on cash that you don’t really need? Know what you need and find a loan that matches that number.

13. Limit the number of loans you apply for

Applying for a loan takes time. You need to get the right paperwork to the lender and read the loan documents thoroughly, on top of making time to seek professional advice on the terms of the loan.

We recommend spending the bulk of your time researching and narrowing down the list to your two or three preferred options, and then dedicating your time and attention to those applications.

14. Be wary of prepayment penalties

Knowing whether prepayment penalties apply is yet another aspect of understanding the “true cost” of your loan.

Don’t forget that the lender is running a business too. When you tell them that you want to borrow $10,000 for 2 months, they calculate the cost of loaning you the money for that period and the interest rate is an important part of that calculation.

If you pay the loan back after 1 month, you’re effectively cutting into the profit that the lender makes. That’s why they may charge a penalty for early repayments. Be aware and take these costs into account.

15. Understand what your security is and the consequences of defaulting

Security is when you agree to put an asset of yours as a guarantee for the loan.

When security is attached to a loan, it’s used by the lender for one thing: if you default on the loan, the bank will sell the security in order to retrieve the money that was lent to you.

If you’re taking out a secured loan, be aware that in the unfortunate case of a default, your asset could be seized.

16. Do your homework

Before you even look at your options, have a chat with your peers, family, friends and anyone else who’s been through the process before. What did they learn? Were there any surprises? Try and get as much information as possible under your belt before getting into the specifics of interest rates and repayment terms.

Doing your homework also involves some number-crunching. Calculating what you can afford before you get started will ensure that you’ve got a neutral outlook and are reflecting on the figures without bias. If you try and do this initial calculation retrospectively, you may be tempted into matching your expectations to the options you’ve already seen, but you’ll get the best results if you do this early and independently.

17. Embrace change in your business

When you are taking out a loan, remember that there will be some degree of change within your business over the term of the loan.

You may want to purchase a new piece of machinery to generate higher profits, but keep in mind the cost of training staff or working long hours in order to operationalise it. Your business may be impacted by seasonal changes, so map out your strategy for meeting your repayments regardless of the month.

18. Apply for grants and subsidies

The Australian Government distributes a huge number of grants designed to give small businesses that extra boost. By taking advantage of grants - like the Research & Development (R&D) Grant - you may be able to give your business a boost and free up some funds for other business activities.

19. Keep the books clear

To be able to effectively track your business and pay back the loan, your financial accounts/books need to be tidy and up-to-date. Clean and clear records of your business will give you an accurate picture of where you will get the money to pay back the loan.

Need help planning your next move, or want to chat to a credit specialist about your business? Give Valiant a call on 1300 780 568.

Alex is the co-founder and CEO of Valiant Finance. He brings a wealth of experience from his time as a banking consultant at McKinsey, and has a background in Business and Law.

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