This is where business financing comes in. With business financing, a lender gives a borrower an agreed-upon amount of money to help them start their business. This loan is then repaid according to a payment plan when the business becomes successful. There are a number of things you need to understand about business financing, though. If you don’t have a comprehensive grasp of what business financing is or how it works, you won’t be able to secure the loans you need.
9 Problems That Arise When You Don't Understand Business Financing
1. Your cash flow is inconsistent.
One of the main reasons people are denied loans is because they don’t have consistent revenue. Many lenders look for businesses that have steady, documented streams of revenue, as they’re considered lower risk. Before you can get a loan, you need to prove you’ll have sufficient cash flow to pay it back.
2. You don't offer up enough collateral.
If you’re just starting a small business, you may not have a significant amount of collateral. Lacking collateral means many loan options are closed to you. There are a number of lenders who will only finance a loan if you offer up collateral in exchange. Should you fail to pay the loan, the lender will then repossess the collateral. Common assets include your house and your vehicle. If you don’t have a large number of assets, though, you may find yourself struggling to meet collateral requirements.
3. You incur too many debts with multiple lenders.
If you walk into a bank asking for a loan, but you already have a significant amount of debt with other organizations, the banker is unlikely to take you seriously. You might open lines of credit with multiple lenders, but this can be detrimental to you when you get in contact with the bank.
4. You rely too heavily on individual customers.
Depending on the business, you probably serve a variety of clients and consumers. You may have some consumers that make up a bulk of your business. This often happens when larger companies contract smaller ones to help with some aspect of their business. It’s good to have large clients, but if large percentages of your revenue depend on them, a lender will be wary. The problem is that losing the clients could tank your business. Your business should never rely on one or two individual clients to prosper.
5. You don't have a sufficient credit score.
Credit scores are a huge part of the financing process. Your credit score is a measure of how reliable you are financial. Paying bills on time increases your credit score while missing payments lowers it. Many small businesses struggle to maintain an adequate credit score, especially after the recession. You need to be aware of how your credit impacts your financing options. With a low credit score, many banks won’t consider you.
6. You over-commit yourself.
Most banks will require you to make a personal guarantee that the loan will be paid back. This means you take on all responsibility for the loan. Depending on your financial situation, you may not be ready for that. If you struggle to meet your expenses each month, you don’t want to add to that load.
7. Your business hasn't operated long enough.
Long-standing businesses tend to be looked upon more favorably by banks. If you’re just starting up, you’ll have a harder time selling a banker on a loan.
8. You don't understand the lender's concerns about the economy.
Lenders only make money if their loans are paid back. They take a risk by investing in you. If you can’t understand the risk and the reward for them, you won’t be able to negotiate an ideal loan.
9. Your business doesn't have strong enough management.
If you run a small business with multiple employees, you need to have a clearly defined chain of command and strong leadership. It’s important to show lenders that your business has an internal organization that can stand the test of time.