Marketlend Academy: 5 mistakes business owners make when trying to get finance
This week, we have the pleasure of again welcoming Bessie Hassan. As the Money Expert for finder.com.au – the site that compares virtually everything – Bessie is an experienced commentator who often appears on national radio, TV, and throughout online publications sharing her best money-saving tips and property advice. Bessie is passionate about empowering Australians to make better decisions, whatever it is they’re looking for.
As the saying goes, you need to spend money to make money – a phrase that many business owners can relate to. Most businesses will need a little help with capital at some stage of their business life cycle, which is where financing steps in.
There’s a lot to think about when seeking business finance, which means mistakes are easily made. We’ve listed five common mistakes that business owners make – so you can avoid making them yourself!
1. Not keeping financial records up to date
For a lender to determine your risk profile when providing finance to your business, they’re going to need to take a look at your books. You’ll need to hand over copies of financial statements including your business activity statement (BAS), profit and loss statement (P&L) and balance sheet for the last three years. If your accounts are messy and not updated then the lender has no way of knowing your financial position and therefore your ability to meet repayments.
If you can’t do this on your own, hire an accountant to help you out. Knowing your finances inside out will show the lender that you’re serious about your business and are confident in its prospect of success – which will give the lender confidence too!
2. Not writing a business plan
Your reason for borrowing funds should align with your long-term business goals. Putting your vision for your business into writing makes it easier for you to share and communicate information about your product or service, strategy and financials. This information can help the lender to understand why you need the money and how long it might take you to repay it. Incorporating cash flow projections into your business plan to show how the loan will be used to generate income can help to convince lenders that you’re a safe borrower. Don’t forget to be honest and accurately estimate your cash flow to account for busy and slow seasons – for example if you’re in the tourism industry, your cash flow might not be as strong during the school term.
3. Taking out the wrong type of loan
There are a variety of financing options available to business owners, making it easy to get confused, but with some research you can easily navigate the pros and cons of your options. Business loans can be either equity finance which is provided by an owner or investor, or debt finance which is provided by a lender and can be secured or unsecured. To decide which path to take, you need to know why you need the money in the first place.
As an example, a short term business loan might be beneficial if you have some big immediate expenses, such as purchasing stock or urgent repairs. This can give you access to cash quickly and you’re only in debt for a short period of time, although remember that interest rates are generally higher. If on the other hand you need to invest in some new equipment, equipment financing might be the way to go. If you take out the wrong type of business loan you could be left out of pocket, and you may see your bottom line take a turn for the worse.
4. Borrowing too much
Before you approach a lender, it’s important to determine exactly how much you need to borrow, because overborrowing could be a costly mistake. While it may be tempting to give yourself a “buffer” and borrow a little more than you need, remember you’re paying interest on the total loan amount and this will add up over time.
For example, a loan comparison calculator shows if you take out a $10,000 loan over 5 years at 5.5% interest with monthly repayments, your total repayments will be $14,361 (the calculation is indicative and used for demonstration purposes only and may not reflect current interest rates or loan sizes).
However, if you borrowed more than you needed, say $20,000 on the same loan terms, you’d pay $25,822 in total. This shows borrowing $20,000 instead of $10,000 would see you pay an extra $11,461 over the life of the loan – so only borrow as much as you need!
The moral of the story? Even if you’re eligible to borrow a larger amount, it doesn’t mean you should.
5. Changing your business structure
If you frequently change your business structure, this may raise a red flag for some lenders. Restructuring can be an expensive and risky time for businesses so lenders are concerned that costs can spiral for owners who do this often and are more likely to reject your loan application. If you know you’re going to need to borrow money in the future, try to keep with the one structure so that lenders are more confident in your ability to repay the loan.
Being aware of these common mistakes is key to avoiding them, which will help you make your business dream a reality. Happy borrowing!