Any business requires a healthy reserve of working capital to ensure it can continue to operate during slow periods or expand. When available funds are not enough to meet a business’s daily expenses, securing financing is essential. Still, many companies make these common mistakes that prevent them from securing the funding to meet their operational needs.
Applying for the Wrong Type of Financing
Businesses can apply for three types of financing, depending on their needs. Three standard options include:
- Term loans involving fixed repayment schedules, with fixed or unfixed internet rates
- Business credit lines allowing borrowers to replenish available funds as they make payments against what they borrow from them
- Invoice factoring whereby finance companies buy other companies’ accounts receivables for a percentage of their value and receive direct payments against them.
A business should consider various factors when choosing the financing options to best suit its needs. These include interest rates, collateral requirements, and the goods or services it offers.
Neglecting To Prepare a Business Plan
A business plan is essential for borrowers who need working capital for start-ups or expansions. Lenders want to know precisely how borrowers expect to use funds and how they expect to repay them. Therefore, they typically want to review a business plan that defines a potential borrower’s target market for its goods and services, current cash flow, and financial projections. Traditional lenders are unlikely to risk funding a business that does not present a thoughtful business plan as part of its application.
Neglecting To Gather Appropriate Documentation
Although lenders may not share the same criteria for approving a business’s funding, most require some documentation to help them assess their risk before moving forward. For example, in addition to a business plan, lenders may request profit and loss statements, tax filing reports, vendor contracts, or other documents concerning a business’s financial entanglements or liabilities. Borrowers who prepare documents before approaching lenders appear well-organized and receive lender’s decisions without unnecessary delays.
Failing To Check a Business’s Credit Score
Business owners planning to apply for financing should know their business credit scores before approaching potential lenders to have an opportunity to correct errors that may interfere with financing approval. In addition, borrowers who know in advance that their credit scores are low can approach only lenders more likely to work with them.
Having a good reserve of working capital can help a small business stay on course or grow, and finding the appropriate funding option is essential for achieving that.