Finance

5 Common SME Financing Mistakes to Avoid

Running your own business is both an exciting affair and a huge challenge. Once your SME begins to take off, it’s important to invest some money in it. As they say, to make money, you have to spend money. Of course, these funds don’t tend to just sit around waiting for us to spend them, so financing becomes an important theme on your mind. Many businesses inject the first bit of capital by taking out a loan. While this is a great way to get some liquidity for your company, there are some common SME financing mistakes that you should make sure to avoid. Keep reading as we walk you through the top 5.

1. Table of Contents

   Lack of Planning and Preparation

Starting your own business is an exhilarating time in your life. Ideas keep flowing, the market goes on growing, and you just really want to get started as soon as possible. However, while it is important to move fast in these early stages of business development, it is also essential to do some in-depth planning. If you lack planning and preparation in your business model and financial plan, then you might end up losing a lot of money, clients or both. So before you do apply for any loans or other types of financing, be sure that you are prepared.

How can you do this? By creating a detailed and thought-out business plan. It should include calculations of your potential expenses, the cost of production if that’s applicable, all salaries, including yours, marketing, and other business-related expenses. The plan should also explain how you will use this money and provide you with a sample budget, which will help you to manage to spend. Once you have a realistic financial plan for your business, you can start looking for ways to finance it.

2. Getting Your Calculations Wrong

When you get into something new, it’s hard to estimate exactly how much money you’ll need. Both underinvesting and overinvesting can be detrimental to the success of your business. If you are not too well-versed in financial planning, then it’s likely worth the time and money to invest in a financial advisor. You can also reach out to other entrepreneurs who have built similar businesses. SME owners tend to have a tightly-knit network and you will likely be able to find a mentor among them.

Some things that many business owners get wrong at first are the costs associated with salaries, production and time. First of all, you must pay yourself, otherwise, your business cannot be considered productive. On the other hand, production costs can often add up to more than what it seems, due to mistakes or delays. And finally, time costs money. So don’t forget that when you are financing your business, you are not just investing cash, it’s also your time and that of your team.

3. Underestimating Real Fees (including hidden ones)

Part of your financing calculations should include understanding how much it actually costs to finance your business. While your actual investment may be, say 10,000 USD, what it will cost you to invest this money may be different. That’s because you’ll have fees that you need to pay if you take out a loan, including interest rates and any hidden fees, such as service fees, late payment fees, etc. Whatever amount you plan to take out for SME financing, make sure you sit down to read all documentation properly and review all costs. Then, make a calculation of these costs to see how much you are paying on top of your investment.

4. Overestimating the Need for Collateral

Securing capital can be tricky and often you need collateral to ensure your loan. Be careful not to put up too much of your personal belongings for collateral in case your business goes south. On the other hand, don’t overestimate the need to put up collateral altogether. Sometimes it’s just not necessary – there are plenty of lenders out there, who may be able to create a different arrangement. So shop around and find the one that works for your current financial situation.

5. Selecting the Wrong Provider

By borrowing money for your SME, you are hoping to enter into a long-term relationship with a business that understands your needs and who you can evolve with as an entrepreneur. While it can be tempting to take the first loan you get offered, it’s best to shop around. Not only does the interest rate matter, but also the conditions and types of services that the lender provides. Do they have specialized advisers for SMEs? Do they provide services specifically targeted to your industry? Are they flexible with financing start-ups? Is there anything else that you feel that you need as a service, or will in 1-3 years, which they provide (or not). By selecting the right financial partner, you can create a really positive environment for your business to start, grow and flourish.

Making decisions about your own business is a tough task. It’s often difficult to separate yourself from it emotionally and take a cold hard look at your financial situation. That’s why it’s important to make sure that you have someone outside the company providing you advice along the way. You should also be pragmatic and realistic about your business expenses and revenue-generating potential. This, to avoid any hard losses on your income and overall economic situation. Finally, remember that this is an exciting time – you are branching out into an SME and growing both personally and professionally! Managing your finances is just one part of the equation, so maintain your passion and drive, in order to run a successful business.