Starting a small business can be intimidating and even scary. You have to be ready for all the financial decisions that need to be made during the startup period, but you also need to plan for the future and have the funds for running your company on a daily basis. Therefore, these are a few small business finance mistakes that many entrepreneurs have made and how to avoid them.
Mingling Personal and Business Finances
After you receive your business license from the state, you should get a separate business bank account. You should also have separate corporate credit accounts and cards.
Although you may pay the company’s initial bills, you don’t want your money mingled with the company’s money. If your accounts are the same, you could be held responsible for company debts, and you could be sued personally for company liabilities.
Not Seeking Feedback
At some point, you may have to seek financing for your company. Most small businesses seek traditional bank loans. However, many of these loans are denied. The mistake these business owners make is that they don’t ask why they were turned down. You can’t fix what you don’t know is broken.
Oftentimes, these loans are denied due to low corporate or personal credit, but most lenders also have specific guidelines for approving small business loans. Find out what these guidelines are and what you have to do to meet them so that your next loan application can be approved.
Credit Utilization Ratio Ignorance
Your credit utilization ratio is the amount you owe compared to the total amount of credit you have available. For example, if you have $50,000 worth of credit available, but you have used $25,000, your credit utilization ratio is 50%. This is high and can affect your ability to get additional credit or investments.
Therefore, you should regularly check your ratio. Most lenders suggest staying below the 30% mark.
Not Calculating Loan Cost
Every time you get a loan or credit card, you are charged an annual percentage rate (APR). This is the cost of the loan, and you need to know what this cost is on a yearly basis. Always ask what the APR is on any financing you receive, and then, calculate your yearly costs. If your bank won’t provide this information, find another lending institution.
Although the initial phases of a startup can be overwhelming, learning about the mistakes others have made and finding strategies to avoid them can improve your success.