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Updated: October 16th, 2023
Most business owners need financing at some point in their operation’s growth. But just because business financing is common doesn’t mean it’s always successful. There are many small business owners that make financial mistakes when securing financing for the first time.
We talked to five real business owners about their personal finances and missteps in the funding process and what they’d do differently going forward. Here are the biggest financial mistakes they made—and the valuable lessons they learned along the way.
When you’re new to the business loan landscape or need funds fast, it’s tempting to skip the lender comparison stage and submit a loan application to the first lender you find. But rushing the process can leave small businesses stuck in subpar situations.
That was the case with Barry Brown, the business owner of Counter Culture DIY, an e-commerce site for art epoxy resin and supplies. When Brown got a small business loan from a local lender to expand operations and invest in new equipment, he was faced with a high interest rate.
“The loan put a strain on my cash flow, making it difficult to meet other financial obligations. The repayment terms were also quite rigid, and I found it challenging to adjust them to align with the fluctuating revenue of my business,” Brown explained.
Plus, he added, the application and approval processes for the loan were lengthy. “It required extensive documentation, financial statements, and business plans. The process was time-consuming and often delayed my plans for growth and expansion.”
Greg Rozdeba, the Co-Founder and President of Dundas Life, a digital insurance brokerage, said the biggest funding mistake he made was not choosing the right loan. “There are many different types of loans on the market and each one has its own purpose. I took a long-term loan with some assets as collateral because I was in need of cash to pay back my payables.”
But Rozdeba’s long repayment period didn’t make sense for his short-term financial needs, and he ended up getting hit with prepayment penalties. “I was stuck with the loan even after I had paid everything back. It cost me a lot in the long run,” he explained. Many small businesses fail to take the time to assess the financial risk and benefits of using different lenders or types of loans.
Take the time to review and compare a handful of different lenders and loan products before picking one to cover businesses expenses for expansion or growth. “It’s essential to consider not only the interest rates but also the repayment terms, flexibility, and customer service provided by the lender,” Brown explained.
Brown said he’d tell other business owners to “explore alternative financing options beyond traditional banks. There are various online lenders and alternative funding sources that may offer more flexible terms and faster approval processes.” Avoid costly mistakes by slowing down and taking your options into consideration.
Comparing your loan options is just the first step to getting funding — you also have to do your due diligence when presented with a loan contract. That’s what Amber Dixon, the CEO of Elderly Assist, an organization dedicated to supporting elderly people, learned when applying for financing.
“We initially went with a lender that offered a seemingly attractive interest rate, but we didn’t fully understand the hidden fees and terms associated with the loan,” she explained. “Throughout the repayment period, we faced challenges due to the inflexible repayment structure and unexpected fees.”
Dixon said her borrowing experience taught her “the importance of thoroughly researching lenders and understanding the full scope of a loan agreement before committing.”
Many entrepreneurs and business owners rush into working with a lender that seems great on the surface. Doing your due diligence means reading a lender’s customer testimonials, reviewing their fee policies and payment structure in detail, and going over the fine print of your loan agreement. You need to understand exactly what upfront costs and ongoing payments your loan entails, as well as what you’re on the hook for financially if your company defaults on the loan.
Getting business financing is only helpful if you know how to efficiently allocate the funds. Borrowing without a business plan means you risk losing time and money. Kamyar Shah, the Fractional COO of Kamyar Shah, a business and management consultancy, knows this firsthand.
After getting a lot of new business inquiries, Shah decided to scale up and invest more money in his consultancy. “Although I’m a management advisor, I made the mistake of not having a ready money-management and allocation plan for my funds, which led to the money sitting idle for three months in my bank account.”
Shah said the excitement of securing funding overshadowed the logistics of what to do with that money. “After I raised funds with investors, I didn’t have any plans in action. I had no direction about whom to hire, where to deploy extra money, and which marketing campaigns needed to be scaled up for generating extra appointments.”
Shah said he underestimated how much time and strategy it would take to properly plan for the fund allocation. “I ended up paying three months of interest from my own pocket, just because I didn’t plan in advance.”
It’s important to evaluate your financial needs and determine where you’ll allocate business financing before you even apply for a loan. Start by assessing your business’s financial statements and clarifying your immediate and long-term goals. From there, calculate exactly how much money you’ll need, break down what you’ll put it toward, and come up with a realistic timeframe for deploying the funds.
One of the most common mistakes business owners make is borrowing more than they can handle. Charlie Wright, Operation Director at Epos Now, a cloud-based software provider specializing in electronic point of sale, knows this problem well.
When Wright needed new equipment to improve the company’s production process, he secured a bank loan. “Although the investment seemed promising, unforeseen market changes impacted our revenue. As a result, we struggled to meet the loan repayment obligations,” he explained.
In the short term, struggling to make payments can disrupt your budgeting and cash flow; in the long term, it can lead to debt overload and difficulty maintaining operations.
Make sure you know your business’s repayment capacity before applying for funds. “This experience taught us the importance of conducting a detailed financial analysis, considering potential risks, and having a contingency plan in place,” said Wright. It’s a good rule of thumb to have a contingency plan in place before applying for any loans.
In addition to forecasting your revenue, sales figures, and cash flow, it’s also critical to factor in larger economic conditions and market trends that might affect your profitability or revenue consistency.
“Moving forward, we focused on building stronger cash reserves and exploring alternative funding options to ensure we could manage future borrowing needs effectively,” Wright explained.
Want more guidance? Here are four factors to consider when deciding how much money to borrow.
If you need business financing — whether it’s for the first time or fifth — consider Funding Circle. We pride ourselves on a transparent, fair, and efficient borrowing process, with fixed monthly payments and no prepayment penalties. Read our FAQs so you know exactly what to expect, check out our Borrower’s Bill of Rights, or see what our amazing customers have accomplished with their Funding Circle loans.
In addition to our signature business term loans, we also offer business lines of credit and SBA loans. Applying takes just a few minutes; once you submit your application, one of our dedicated Loan Specialists will reach out within a day to answer questions and guide you through the process.
Paige Smith is a content marketing writer who specializes in writing about the intersection of business, finance, and tech. Paige regularly writes for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.