You don’t need a degree in macroeconomics to manage your small business’s finances. In fact, there are plenty of resources, from bank managers to accounting software programs, that can help you wade through the ins and outs of loans, bills, and pay checks. Yet many entrepreneurs continue to make simple mistakes that can easily jeopardize their companies’ bottom line and brand.
Here are some of the most common financing blunders small businesses make— and how to avoid them.
Banking on a good idea.
You may have come up with an incredible concept for a new business but don’t expect investors to come banging down your door. “There are a lot of people who think they don’t need anything but a good idea to receive a loan,” says Linda Pinson, a Tustin, Calif.-based small business consultant and author of Anatomy of a Business Plan. “But the reality is, you need good credit and good equity.” For this reason, Pinson recommends small business owners take steps to improve their credit score and carefully examine their financial assets before seeking out capital.
Failing to take a government-backed loan seriously.
While the U.S. Small Business Administration guarantees some $12 billion per year in loans, many small business owners assume that all loans are backed by the government. In fact, Pinson says, “A lot of small businesses don’t really understand the rules for qualifying for a loan and think that if they apply for an SBA guaranteed loan, it’s like getting a loan directly from the government.” Instead, Pinson says that not all small business loans are SBA guaranteed, and those that are still require prompt payback including interest charges.
Viewing all types of credit as one in the same.
No two types of credit are created equal. In fact, Dana Karlov, owner of Bagable Gifts, a Chicago-based provider of high-end gifts for special events, says that while she obtained four lines of credit through her bank, she intentionally avoids using credit cards to subsidize her business. That’s a smart strategy, especially if you’re strapped for cash, according to Pinson. “If you’re already in a jam, it’s certainly not a good idea to get yourself even further into a jam,” she says.
That’s because credit cards can come with high interest rates and can be difficult to pay off. Even worse, many entrepreneurs use personal credit cards to subsidize their businesses, which can damage your FICO score if payments are managed properly. In fact, the Meredith Whitney Advisory Group reports that 82 percent of small business owners use credit cards as a “vital part” of their overall funding strategy.
Nevertheless, relying on a low-interest credit line to run your business is no easy ride either. Karlov says, “I make it a point to pay off my minimum each month and to make all my payments on time. I also made sure the interest rate was manageable so that I could cover the costs with my company’s profits.”
Secure financing. Now relax.
Now that you’ve obtained the financing you need to run your small business, the rest will just fall into place, right? Wrong. Many small businesses rely on accounting software to manage their lines of credit, credit card expenses and loans. “I’m not a math or accounting person,” admits Karlov. “Intuit’s QuickBooks has really streamlined the process for me and takes the stress out managing my finances. It’s very easy for me to see where my money is going.” What’s more, accounting software can ensure that a line of credit or SBA-approved loan is actually helping to generate revenue for your company.