Working Capital for Small Businesses: Avoid these Common Mistakes

By P2Binvestor Staff

If your business is growing and needs to expand, you’re likely going to need to find a financing solution that is right for your business. With the tight credit market, banks have narrowed their lending requirements and as a result, it’s more difficult for an entrepreneur or small business to acquire working capital from traditional lending institutions today.

What it Means

Today, businesses are doing their best to get creative, often acquiring working capital from a variety of sources. Finding working capital financing today can be quite confusing with numerous hidden fees and competition among alternative lenders, and unfortunately a wide gap between prime rates and predatory rates exists. Some lenders are getting creative as well and rising up to fill this gap with more flexible and competitively priced lending options, but there is much more demand than supply when it comes to affordable working capital available to businesses in that critical stage of not being bankable and needing capital for growth on the road to being profitable.

Choosing the Right Financing Opportunity: Why it Matters

The right small business financing will make a significant difference in the success of your business. Especially for new business owners, there is an increased importance on having access to capital—even if it comes at a cost—when you need it. When you find yourself in a perfect storm of rapid growth, slow-paying customers, and irregular cash flow, you end up in a precarious position of not being able to make payroll, buy more inventory, or meet other monthly obligations. Weathering the storm with the wrong financing solution is a factor that takes many businesses out of the game altogether. The good news is that there are plenty of opportunities for you to make the right decision.

To do that, here’s a list of the biggest mistakes that small business owners make when starting their business.

  1. Poor planning

    The biggest reason that businesses fail isn’t money alone, but can be attributed to poor planning. Poor management of the business is a major reason a business may fail. Poor planning often causes an owner or management team to be reactive instead of proactive, and being proactive is key in evaluating cash position, seeking funding, and being objective—not desperate—in selecting funding.

  2. Lack of funding

    Another clear reason businesses fail is because of inadequate funding. If you have too little or not enough access to capital, your business may fail. Smart business owners diversify their capital sources and project losses well in advance, which allows them to seek out funding options and be prepared for difficult financial situations before they strike.

  3. Access to capital when the going gets tough

    Having access to enough capital that is easily obtainable when the going gets touch is quite important. Businesses should try to get a line of credit—whether its a bank line, an asset-backed line from an alternative lender, or a receivables-backed line like P2Binvestor offers—to help be a fail-safe when things don’t go as planned, to deal with explosive growth and/or seasonal fluctuations, or when funds become tight.

  4. Poor financial management

    Skills in managing the company’s financials are also important. You need to make sure that the person who is managing the money is on top of the company’s financial position and regular reports accurate numbers to company leadership. We’ve heard too many stories from business owners who took a laissez-faire approach to their financials until it was too late. Is your company showing any losses? If so, why? Work with your CFO or financial professional, whether she is in-house or outsourced, regularly to address any financial irregularities when they arise. Get regular information from your CFO about business performance. Make sure you do not find yourself in a position in which it is too late to rectify a poor financial situation.

  5. Choosing the wrong loan or other financing, or maxing out credit cards

    The wrong loan with the wrong rate with the wrong financing company is a serious error made by many small businesses. This often happens when business owners or managers have not been proactive when it comes to steps 1-4, and as they say, desperate times call for desperate measures. Watch out for costly interest rates, poor terms, or the wrong type of loan to avoid facing more serious problems down the road. When selecting a small business loan or other financing options, knowing which type you need and in what amount is vitally important. Further, many businesses will max out numerous credit cards, which can prevent the business owner from qualifying for a bank loan and other financing in the future. If you have collateral, like receivables, you can get a line of credit from P2Binvestor or another alternative lender at a rate that is usually less than the interest rate on a credit card.

 

So what are the options when it comes to making an informed, educated choice among funding options?

If your business can qualify, the most desirable and affordable financing option is a traditional bank loan. Banks can borrow money at very low rates from the Federal Reserve, so they can pass those savings onto customers with long repayment terms. However, banks are incredibly strict in lending to businesses because of how they have to manage risk, and many business owners and entrepreneurs find bank underwriting processes and policies to be extreme—if they can even qualify.

Even more established businesses still can have trouble acquiring bank financing because of any discrepancies in the owner’s personal credit score, lack of collateral, and numerous other factors.

Alternative lenders have to pay more for their capital and must then lend on top of that, which is why alternative lending options will almost always be more expensive than a bank loan. It’s important to learn about all of the different types of alternative financing options available and determine which one is right for your business. Then, you’ll be able to make an informed decision that will give your business the best chance of succeeding. The good news is that now there are more and more lenders providing reasonably priced working capital to businesses in the alternative lending space today, so businesses no longer have to think about financing options as being either a bank loan or a really expensive—and sometimes predatory—line of credit from an alternative lender.

 


P2Binvestor is a crowdfunding platform for working capital financing and a leader in crowdfunding receivables. P2Binvestor utilizes the power of technology and its crowd of accredited investors to simplify lending and provide working capital to growing businesses faster and at more affordable rates. The company offers three flexible products: A receivables-purchase product, an asset-backed line of credit, and a credit line secured by future revenue (designed for SaaS companies). P2Binvestor lends to companies in all 50 U.S. states in various industries including staffing, natural foods, manufacturing, technology, and more. P2Binvestor has been providing businesses’ receivables financing since December 2012. For more information, like us on Facebook and follow us on Twitter @P2Binvestor.

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