Tips for Avoiding Common Startup Finance Mistakes

If you have ever considered opening a business, you have probably heard all the statistics about business failures within one, two or five years. You may have even been discouraged. However, many of these startup failures are from financial mismanagement. These are tips for avoiding common small business finance mistakes.

Know Your Credit Utilization Ratios

Credit utilization ratios is a comparison of the amount of credit you have versus the amount you owe. For example, if you have a credit card with a credit limit of $10,000, and you owe $5,000, your credit utilization ratio is 50%.

When you seek financing for equipment, buildings, inventory or other business expenses, the finance company looks very closely at your personal and business utilization ratios. Therefore, pay close attention to both ratios. You can find a calculator online if your financial situation is more complex. However, try to keep this ratio under 30%.

Ask Why You Are Turned Down

Many business owners refuse to ask why their applications are turned down. However, you cannot change what you do not know. Therefore, if you are ever turned down for financing, find out why and ask what you can do to improve your application status in the future.

Most financial institutions are willing to discuss your application further. For example, they may state that your credit score was too low or that your startup has no business credit score. Also, you may not have met lender qualifications, e.g., your loan amount could have been too small. Although you should check your lender qualification requirements before you apply, you may have missed something.

Learn About All the Applicable Fees

Lenders charge you a number of fees when they provide financing. For example, in addition to your annual percentage rate, you may pay origination fees of up to 4% of your loan value. You may also be responsible for contract fees, due diligence fees and administrative fees. In fact, your finance company can even charge you just for applying. Learn about every fee you will be charged before you submit your application.

Calculate Your APR

Before you take out a loan, you need to know exactly what your payments will be, when they will be due and how much you will pay every year. Ask your lender what your APR is. Some may even help you calculate its yearly cost. If any lender refuses to help you with this, walk away.

You can set your business up for success by doing your financial due diligence. Learn everything you can about financing and what is available at each institution before you apply.

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