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5 Common Mistakes in Financing to Avoid for Small Businesses

by Altaf Shaikh
5 Common Mistakes in Financing to Avoid for Small Businesses

Are you in the process of creating business plans for your current or future small business? Do you worry about the financing aspect of it all? If so, then you need to learn all that you can about the mistakes in financing you need to avoid.

Doing so can give you a leg up in your industry. You’ll be able to focus on paying off debt faster and making sure that no financial aspects of business stand in your way.

See below for the several different mistakes that you should actively avoid making to help your small business have as much success as possible.

1. Not Investing Your Money

The money that you and your company make should never sit stagnant in a bank account. There are many opportunities out there every day to, as they say, “turn your money into more money”. 

One of the biggest mistakes that small business owners are only spending money on their immediate company needs. 

However, if you want to see true financial growth, then investing in certain opportunities within the stock market can help you see a significant return. You can gain capital and ownership with certain investments.

For example, you could consider the idea of buying distressed debt to take control of that company once it enters the bankruptcy process. It’s a great way to buy bonds at a low price.

Be sure to talk over some investing strategies with your company’s financial advisor. See what recommendations they have for investing some of your organization’s revenue.

2. Improper Insurance

Imagine the horror of waking up one day, driving into work, and finding out that a fire occurred in your company’s office building. Is your company prepared to handle a workplace-related injury to one of your employees?

Too many small businesses try to cut corners on their company budget by electing not to have proper insurance. Not only is that huge risk, but it’s also illegal in some instances.

For example, any company with 1 or more employees is legally required to have workers’ compensation insurance. This is meant to protect your company, your employees, your clients, and your assets.

Many companies also make the mistake of having the wrong insurance. They go for the first provider that they find without looking around to consider other options.

It’s important that you take the time to shop around. This can help you find more budget-friendly premiums, as well as better coverage in emergencies. 

Be sure to find great coverage for general liability insurance, cyber insurance, commercial auto insurance, workers’ comp, and more. You can never be too careful.

3. Borrowing Too Much Money

There’s a fine line between “too much borrowing” and “not enough”. Many companies flirt with that line throughout their entire existence.

The last thing that you want to do while growing a small business is putting yourself in a situation where you can’t pay off your debt. If you do, you risk your company going over before it gains any traction in the marketplace.

Some owners are a bit too optimistic about their revenue projections. They take out significant loans thinking they’ll be able to pay it back with the revenue they think they’ll make.

There’s also a situation where lenders are willing to give you more. While business loans are a great help, make no mistake about it, those lenders aren’t looking out for you when they offer more money. 

Stick to the amount that you’ve calculated with your team. How much money do you need for the new project? Don’t stretch yourself too thin, but be honest about the amount you need to properly fund your next project.

4. Not Having a Purpose for Each Dollar

As was mentioned earlier, your company’s revenue should never sit stagnant in a bank account. Even your savings should be placed in a savings account with interest.

Most owners don’t do a good enough job of handling their revenue. They don’t take the time to sit down and create a budget to address the company’s present needs.

For example, say you make $1,000 in one sale. Most companies would let that money sit in an account and use it towards whatever comes up first.

However, thriving small business owners will assign a purpose for all of it. They’ll dissect certain percentages of that $1,000 towards things like an emergency fund, marketing for the company, paying off business loans, and so forth.

5. Not Hiring Proper Talent

If you didn’t think hiring people would play a part in your business’s financial growth, think again. Too many owners try to perform the jobs of 10 people and 5 different departments to save money from hiring an employee.

However, doing so can be a detriment to your company long-term. As your company grows, so too will the demand for your product/services. You’ll need to hire the best and the brightest to meet customer expectations.

If you don’t have the finances to add an in-house employee for your needs, then consider outsourcing the needs. For example, hire a digital marketing agency if you can’t afford to add someone to your in-house marketing staff.

Avoid These Mistakes in Financing at All Costs

Now that you have seen several mistakes in financing for your business to avoid, you must memorize them and do all you can to dodge them.

As they say, you need to spend money to make money in business. However, it’s always important to control that spending and ensure you aren’t overextending yourself.

Be sure to browse our website for more articles on business financing, as well as many other topics that you will enjoy.

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