The 7 Sins of Small Business Financing

Small business financing is a delicate thing. Small businesses don’t always have a lot of money and they certainly can’t afford to commit any of these 7 sins.

Most entrepreneurs don’t think about small business financing when they are dreaming of their grand entrance into the business world. Most aren’t thinking about sustaining their business beyond a small amount of time because they are certain they will have more than enough money coming in from their talents, services and products. While that’s a great way to think about money, it does nothing to avoid falling for one of the 7 sins of small business financing.

Small business financing is simple. It is the money that will keep a small business operating. There has to be money behind any small business and no matter how much money there is, it has to be guarded and cared for because it is a precious resource. Most small business owners are forced to close their doors, virtual or brink and mortar, within 2 years. Many of those business owners often find their financing is at the root of their losing their companies.

Small Business Money is Slippery Money

The truth about money is that it can be hard to hold on to. It takes a lot to operate a business and many small business owners find themselves focusing on day to day operations more than the details of their money. It is that oversight that leads to owners and entrepreneurs committing one of the 7 sins of small business financing.

These sins are small enough to overlook in the beginning but the impact is horrific. Most small business owners regret committing these small sins and have learned valuable lessons. Instead of learning from experience, these sins should be avoided at all cost.

The Sins

Sin #1: No Monthly Bookkeeping

This is a sin to avoid at all costs. Every business owner and entrepreneur should take the time at least once per week to address their finances. It doesn’t matter if it’s a weekly phone call to a bookkeeper, accountant or a day spent looking at Quickbooks. It is something that must be done.

Bookkeeping sounds very boring but it should be very exciting to business owners. Bookkeeping done consistently will show business owners what opportunities they have to increase their revenue and how much money they have. With great bookkeeping, business owners know just how successful they are and what they need to do to keep being successful.

Sin #2: No Cash Flow Projection

It’s hard to make money when you don’t know where to look. Thousands of businesses are forced to close daily because they didn’t track what was profitable for them and didn’t have a plan for keeping or increasing their cash flow.

A simple definition of cash flow is the money coming in and out of a business. When a business owner accurately keeps track of their money, they know what products and services are profitable and what is costing them a lot of money. Without a cash flow projection, business owners don’t know what to do to increase or maintain their revenue. They also don’t know what they need to stop to conserve their revenue.

When you don’t know what you have coming in or going out, it’s hard to run a successful business. There is no way to make great business decisions without knowing where you stand financially. Any business owner that does this is killing their business very slowly without realizing it.

Sin #3: Little to No Money for Operations

Small business financing says so many things to so many people. But for many, it doesn’t scream operational costs or working capital. That is a huge reason why many small businesses fail; they don’t have enough or any money for their operational costs.

The truth is that every business has operational costs. These costs can be smaller than some expect while others have huge operational costs they maintain. No matter the size of the cost, the truth is, responsible business owners need to make sure they have the money they need to sustain their business. It is not okay to start a business without this money set aside and think these costs can be immediately covered when a client buys a product or service. That is asking for a lot of trouble.

When starting a business, entrepreneurs and business owners should have at least 8 months to a year’s worth of capital set aside to sustain them. If going into a competitive field, business owners should do their financial homework and set aside their operational costs. That will help stop businesses from closing before they have a chance at success.

Sin #4: Terrible Money Management

Managing the money of a business is not a game. It is not for someone that doesn’t take their money seriously. Small business financing is the blood of any company and terrible money management is the same as slitting the veins of that business.

Money management skills can be natural or learned; it doesn’t matter so long as they are present and used. Business owners need to know what’s coming in, what’s going out, what needs to be paid and how much money has been earned. Without knowing these things, there is no way anyone can successfully make business decisions.

Terrible money management skills will also cause enough stress in a business owner’s life to distract them from the cycle of making money. How can anyone do what they love or make money when they are stressed about having money? Terrible money management will lead to a vicious cycle of stress and financial distress.

Sin #5: Having and Maintaining Bad Business Credit

A lot of small business owners start their business with dreams of immediate wealth and riches. They have great ideas and have saved money to get started. But they don’t realize for their business to succeed, they need scale it for growth. This is where having bad credit becomes a huge burden.

When a business owner has bad credit, they normally don’t have the finances they need to grow their company quickly. That can mean anything from needing to buy or replace supplies quickly, add additional equipment, add staff to their company and many other things. When a business owner has terrible credit, they don’t have a lot of small business financing options.

Yes, paying for everything with cash is great. Having great business credit is even better. Great business credit shows creditors that a business owner can be trusted to repay the money that’s loaned to them. Great business credit gives business owners the access they need to money when it’s time to expand and make more money.

Writing bad checks and not paying on time will not lead to business success or financial freedom.

Sin #6: Lack of Recorded Profits and Success

Yes, operating a company is difficult. It is time consuming and exhausting. That is the life an entrepreneur signed up for when they decided to work for themselves. But that exhaustion is no excuse for not recording profits and losses. This is a chore that must be attended to on a weekly, monthly and annual schedule.

As small business owners become successful and want to grow, they often reach out to investors and creditors for more working capital. The first thing most investors and creditors want to see is a record of profits and if there are losses, what caused them. Before anyone gives a small business owner or entrepreneur a check for anything, they need to know their money will be returned with interest in a timely manner.

Small business owners that don’t have any profits to show before asking for money, great personal credit is a must.

Sin #7: No Small Business Financing Plan At All

If the reading the previous 6 sins of small business financing didn’t bring home the importance of having a plan, this should.

Having a plan for small business financing will help business owners create or find the money they need to support their business currently and into the future. Having a financial plan will keep a small business owner currently informed about debts owed to them and what is owed to their creditors. Having a financial plan for a small business will help ensure doors don’t close because there is no emergency funds to address surprise business needs.

No matter the business or how small it starts, having a small business financial plan is critical for success. When a business owner or entrepreneur knows where their money is and where it’s coming from, they don’t have the stress of next day closing. Business owners that address their financial needs in a timely manner don’t have to worry about paying for expansions or supplies for an unexpected event or business need because they have it. While some don’t believe their success is tied to the money they have in the bank, the most successful startups and business owners know differently.

Small business turns into big business when business owners have addressed their small business financing plans.