It’s no doubt starting a business has great potential, but one frightening challenge that many startup owners have is to get the required finances to fund their operation. This is the usual case despite the numerous financing opportunities available to business owners. These opportunities include partner financing, crowdfunding, venture capitalists, angel investors, and business loans to name a few.
But as an entrepreneur, you need to be strategic in planning to guarantee the success of your startup. To ensure the possibility of it happening, here are do’s and don’ts to consider for small business financing.
1) Do Your Research
Financial planning is essential for all businesses and it must always be observed. Doing this is vital because, as a small business owner, you have a constrained budget. Hence, you don’t enjoy the privilege of spending a considerable sum of money. Therefore, you should always start with exhaustive research on why to request small business loans. Some of the common reasons for which you’ll need a loan include;
- Fill cash flow gaps
- Scale your startup
- Buy equipment and supplies
With a clear idea of why you need the business loan, you’ll be able to determine the best funding options for your startup. It’ll also reduce the risk of making poor financial decisions that might end up overstretching your budget and underestimating your business rivals. The combination of such mistakes is what might lead to the collapse of your startup.
2) Do Create A Factual Budget In Advance
You shouldn’t start requesting small business loans without setting aside time to create a budget in advance. Doing this is crucial because startup owners commonly use inflated figures when looking for funding. Also, these figures aren’t entirely factual and are usually hyped rather than the actual profit that can be generated.
Potential financiers of startups such as banks or other financial institutions are also looking to make money. Therefore, they end up not offering you the needed funds. With this in mind, you shouldn’t solely approach your lenders with an idea but rather a solid plan on a clear budget on how your business will make money.
3) Do Borrow The Required Amount At The Appropriate Time
With a clear financial plan in advance, you’ll be able to determine the precise figure your business needs. This helps you figure out exact numbers such as the estimated revenue and costs as well as negative and optimistic forecasts. You need to have such facts in mind to resist the temptation of borrowing more than what you need. Avoid doing so even if you have a higher credit score.
This prevents a scenario where you underestimate how much money your startup needs. If you do so, it might reduce your growth because of not budgeting for unforeseen expenses. It also ensures you don’t take too much debt as this only increases your payable interest and fees.
You should also pick out when is the best time to borrow. Borrowing too late might lead to you not having the needed funds to carry out business activities. Thus, it puts pressure on your startup. In contrast, borrowing too early increases the chances of spending the funds on other things that you hadn’t earlier intended.
4) Don’t Exaggerate The Figures
When starting a small business, it’s normal to be optimistic about your new venture. However, it’s best to take a precautionary approach and not underestimate your expenses and overestimate your revenue. Doing this to convince potential investors in financing your small business is not only untenable but might also be illegal.
It’s also important you don’t underestimate your expenses because they’ll undoubtedly be higher once your business hits the ground. This usually happens regardless of how exhaustive you’ve been when doing your research.
Likewise, you shouldn’t overestimate your expected income because it’ll likely not be as high as predicted during your first year of operation. Instead, go through your figures and adjust them accordingly by considering other factors. These factors include political environment, industry or market trends, your performance, and your rival’s performance.
5) Don’t Stress Too Much About The Finances
As a startup owner, it’s easy to get carried away by the potential risks involved in borrowing funds needed for running your business. However, it’s best to ease your nerves by shifting your focus. It will be more effective to prioritize creating a business plan, budget, marketing strategy, and financial projections.
This is critical because, as a business owner, you also need to believe in your startup. This is necessary to better convince prospective investors on why they should invest in your business.
6) Don’t Forget To Pay Taxes
Regardless of whether it’s a startup or an established firm, every business is expected to pay its taxes. Different factors determine how much taxes you should pay, including the country of operation and the type of startup you run. But after starting a small business, it’s easy to be overwhelmed by the daily functions of your startup and forget or ignore your taxes. This is a mistake you don’t want to make as it negatively affects your company’s operations leading to its failure.
You should avoid this by taking time to familiarize yourself with aspects regarding tax. These include the rules, tax rates, filing deadlines, and penalties for any tax violation. Also, this usually differs depending on the country or industry. With this in mind, you’ll always be able to observe your tax obligation, which is critical to ensure the success of your business.
7) Do Track Your Numbers
Potential investors expect you to have a firm grasp of your finances and have the necessary paperwork. However, this is one thing many small business owners often overlook. You must never do such a mistake because you won’t get a clear picture of your company’s performance. A prospective lender will see this as incompetence and doubt your ability to pay back their money with interest. Thus, you might not get the required funding.
Knowing this, you must take your time to maintain proper documentation. This shouldn’t necessarily be complicated and time-consuming since there are several document management software you can use.
For many business startups, getting small business financing is one of the greatest challenges they may face. Therefore, you need to think of creative ways of better appealing to potential lenders. This is necessary to be provided with the required funding. This article has mentioned useful do’s and don’ts of small business financing for you to consider. Hopefully, it’ll help you land the money needed to finance your startup.