Pitfalls to Avoid When Financing Your Business
When small-business owners look for financing, they make a lot of mistakes. Here are six common issues to steer clear of.
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If you or someone you know is looking into starting a business and needs financing, then our story could save them a great deal of money, frustration and disappointment.
“There are many pitfalls to avoid when securing funding for your first business, and understanding the risks is critical to success, your own peace of mind, and – something so often not considered – the impact on your family if the wrong type of financing is selected,” says Mike Rozman, CEO and co-founder of online lender BoeFly and a former VP at JP Morgan Chase Global Bank.
Online lenders connect start-ups with sources of financing which were, “One of the few blessings that came out of the Great Recession of 2008,” Rozman says. “We chose the name BoeFly to stand for ‘Business Opportunity Exchange’ and ‘Fly’ meaning speed. Online lenders are able to process loans with far less delay and hassle in most cases when compared with conventional lenders.”
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Mistakes Startups Make When Looking for Financing
I asked Rozman to list what startups do wrong when looking for financing and how to remedy these shortcomings.
1. A failure to understand the lender’s criteria – who they generally lend to and why.
Consequences: You will spin your wheels without getting the right outcomes. Franchise business owners find that certain lenders will only lend if there are at least 250 locations in the system. If you are in a startup with only 20 units, and speak with the wrong lender, you will not secure financing, waste a lot of time and wind up frustrated.
2. Not being prepared to tell your story to the lender: “Here is How I Will Succeed.”
Consequences: You will not get the loan.
All lenders need to understand in clear terms how they will be paid back. This sounds simple, but in reality it is the applicant’s No. 1 job. If you cannot clearly show how that loan is going to be repaid – with realistic financial projections – do not even approach lenders.
Online companies work with business owners, helping them to create a lender-ready financing request. The red flag of a suspect financial services company is one where the intended borrower is not required to fully articulate their story and explain how the loan will be repaid. If you hear, “The specifics are not that important,” RUN!
Specificity is vital. Your business plan must explain the source of business income.
3. Assuming that it is going to be a sprint rather than a marathon.
Consequences: Frustration! This is a process, and the applicant must understand that it has different stages. It is not as simple as ordering a Uber or calling Door Dash and obtaining instant service. When individuals do not accept this fact, they become frustrated. Patience and a realistic timeline are absolutely necessary.
Therefore, having accurate and realistic expectations will reduce frustration and allow for more accurate planning. A business owner who needs money in 24 hours will be disappointed, or will wind up paying an extraordinary high rate.
4. Putting all your eggs in one basket – just applying to a single lender.
Consequences: You could wind up paying a far greater interest rate than necessary. Few business owners are aware of those lenders that offer competitive terms. It is important to connect with an array of lenders, which is exactly what the online lending platforms do – they shop for the best terms.
5. Failing to be sure you are dealing with a reputable lender.
Consequences: Radio and the internet advertise all sorts of business lenders that make borrowing seem easy and inexpensive. Before agreeing to work with any lender – especially those who advertise like mad – go to your Secretary of State’s website and look for complaints or actions against them. Read Better Business Bureau complaints and reviews.
If you are in the franchise area, visit the International Franchise Association’s website that lists providers. Also trade associations will have lists of approved lenders.
6. Failing to understand the risks of failure and how it could impact your life and family. Are you really able to do this? Don’t kid yourself!
Consequences: If you are still trying to figure out how to run a business – how to create a recurring revenue stream to meet your obligations – then do not get a loan! If you can’t prove that your business model works, do not get a loan!
It is critical to understand the risks of failure. In the case of an SBA loan, many require the borrower to pledge their home. In the event of failure, it can cost you and your family your home. This is no joke.
Rozman concluded our interview on a thoughtful and encouraging note:
“Ethical lenders want business owners to be successful and not take on obligations they cannot repay. Not everyone should be in business – but those who are passionate can often learn how. For first-timers, franchise investing in a proven business model often works extremely well and should be considered.”
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