One of the most commonly asked questions I get is “what are the most common mistakes that small business owners make when looking for financing?” If you work with small business owners then please comment here if you have a mistake that you commonly see that isn’t covered here.
Let me begin by saying that this is intended for the following groups. According to statistics compiled by Clate Mask about small business owners, which he talked about in detail for Small Business Trends:
•83% are Solopreneurs (1-2 people) & bring in less than $100,000 a year in annual revenue
•6.1% make between $100,000 – $300,000 in annual revenue
•6.8% make between $300,000 – $1 million in annual revenue
So for these amazing & hard working small business owners, which make up over 95% of all the small business owners in the U.S., what are the 2 most common financing mistakes they make?
MISTAKE #1 – NOT KNOWING YOUR BUSINESS FINANCING OPTIONS
This is where it all starts. You can’t know what to do or the best course of action unless you know what the options are. Most small business owners who haven’t been in business for several years think that there are options that simply don’t exist. It’s one of the reasons we put together the free eBook on the 16 Best & Most Common Business Financing Options for your Small Business.
There are really only about 10-12 debt financing options and 3-4 equity financing options that make up the list. One of those financing options that we’ve all heard of are SBA loans. SBA loans are a great option for some people. In fact, we have a variety of companies and lenders we work with who are highly involved in SBA lending. To better understand SBA loans, let’s look at some recent statistics.
This information helps us understand who is a good candidate for SBA financing. It is true that only about 1/5 of 1% (0.002%) of the small business owners in the U.S. get approved annually for SBA loans. The chart shows the average loan amounts but it’s a bit deceiving. You’ll see that in 2011 the average SBA loan was $365k but when you take out the Patriot Express loans to veterans that average jumps up to over $600k.
Bottom line on SBA: They are great loans but unless you’re a veteran then any requests for less than $250k & where you don’t have experience in your business & collateral are going to be tough. For most people, SBA loans become a good option after you can show good earnings & need over $250,000.
MISTAKE #2 – NOT TREATING YOUR CREDIT AS AN ASSET
We see several hundred requests for financing every month. These are good people who are looking to start, build, and grow their businesses. They have dreams. They have goals. They want to either get started or get to the next level. Why can’t we quickly get everyone low-cost financing so they can go after those goals and dreams? Read more about this topic on the Dun & Bradstreet Credibility Corp. blog here.
Two credit-related reasons dominate this discussion.
A) YOU HAVE A LATE PAYMENT OR LATE PAYMENTS ON YOUR CREDIT
Did you know??? ***A late payment only shows up on your credit report if it’s 30 Days Late!! Although we don’t recommend it, if you pay your bill 29 days late it should not report late on your credit report.
***Many people have late payments that they didn’t know about or that are not accurate!
Find out what’s on your credit report and what’s not. If you’re married and in business with your spouse you may want to check out some “insider” tips from my article an SBT. If it’s an asset then you should want to protect and preserve it and possibly even make it more of an asset. If it’s a liability then ask yourself what you can do to turn that around and make it an asset.
B) YOUR CREDIT CARD UTILIZATION % IS TOO HIGH (BALANCE TO LIMIT RATIO)
If you owe an excessive amount on your personal credit cards then this is an area you want to quickly learn more about. It looks like this:
●You owe $20,000 on your credit cards
●Your credit limits (total available credit) add up to a total of $30,000
●This means you are 66% utilized. That’s too high so ask us how to solve this. We can help.
The calculation will include all your personal and business revolving accounts that are showing up on your personal credit report. This is why it’s important to know which cards report to your personal credit and which ones do not. It’s no longer good enough to just use a business credit card for example. Read more here.
So utilization is a big issue because credit cards are so vital to small business owners – and especially the “Solopreneurs” out there. Like about anything else, there is a right way and there’s a wrong way to go about using credit cards. What are the right and wrong ways? Ask us or let us know if you have any questions.
These are the 2 most common issues facing Solopreneurs who want or need financing to grow their businesses. There’s absolutely nothing wrong with being a solopreneur. However, do you want to grow your business and bring in over $100,000 in annual gross revenue? Or maybe you have bigger goals and that’s fine if you do.
If you learn to not let these mistakes get in your way you’ll have a much clearer path to your success!