Avoid common pitfalls: The expert advice of commercial finance brokers
For company owners and managers, finding their way through the complex world of commercial finance can be daunting.
Business growth is often contingent on securing the right financing, which can also present significant challenges. Knowing common mistakes in commercial financing and how to avoid them can save your business time, money, and unnecessary stress.
The article shares insights into how to sidestep common traps by implementing expert advice using brokerage platforms like FundOnion that put you in direct contact with lenders. Let’s explore our options.
Issue #1: Ignoring total financing cost
A common mistake that most businesses make is focusing only on the loan’s interest rate while forgetting about other costs involved in taking that specific type of credit facility.
You must understand the importance of all relevant costs, including prepayment penalties, fees, and other unapparent costs.
Solution
Before you sign an agreement for any form or structure of ITD, such as debt instruments such as bonds or stocks, you should always read through everything, including small print, at least twice.
This is because there could be hidden charges that can come back later, affecting you financially. Ask your broker to break down figures for you to compare different types of loans against each other to find out which has the highest APR giving insight into the total cost.
Issue #2: Failing to match financing with company goals
One common error entrepreneurs usually make when borrowing funds is failing to align their organisation’s long-term goals with the financing structure.
For example, taking out a quick cash loan seems attractive due to the lower immediate cost. Still, it may create cashflow problems if it fails to match revenue cycle timing within a given business context.
Solution
Discuss the various financial packages available with your financial broker so that you can choose the best one that perfectly matches your corporate strategy. First, evaluate reasons behind borrowing, such as working capital requirement, expansion needs, or even purchasing assets, and then go for terms that will not strain you too much financially while achieving your goals.
Issue #3: Poor documentation and preparation
Inadequate preparations could cause unnecessary delays or even lead to rejection of loan applications.
Financial institutions require detailed statements, including business plans and tax returns, to assess the viability of extending credit based on the information provided by borrowers.
Solution
Compile all required papers (like business plans, audited financial statements, and others) together in one folder before looking for lenders so that everything can stay organised throughout the application process. Getting advice from expert commercial finance brokers for proper preparation and presentation of documents is always a good practice.
Issue #4: Failure to recognize credit history impact
The history of your company’s credit score matters a lot during the financing stage because it determines the interest rate charged on loans.
Your suggested interest rate will increase in proportion to your credit score. Borrowing costs become much more expensive in cases where creditworthiness is questionable due to either poor monitoring efforts from business owners themselves or failure to address known issues before applying for additional funds.
Solution
Monitor records about how well your organization has performed financially over time, as reflected in various agencies’ reports.
These reports may sometimes contain errors reflecting negatively against the borrower but can be corrected by following up with concerned bodies. If your credit profile is poor, it will negatively affect your application process. Thus, you should take valuable expert advice to strengthen the profile so that the chances of favourable terms can be secured.
Issue #5: Fund flow management underestimation
Failure to demonstrate consistent fund flow coupled with weak sales could make it extremely difficult to secure any type of financial assistance regardless of strong sales revenue generated annually.
This happens mostly among new startups and small businesses alike, where they end up experiencing low funds a few months after establishment.
Solution
To make sure that your business meets all its financial obligations, it is important to implement strong cash flow management. Lenders are likelier to approve loan requests from companies with consistent cash flows. Moreover, try looking into financing alternatives such as invoice factoring or lines of credit which can help in evening out the fluctuations in cash flow.
Issue #6: Selecting wrong financing type
Different types of business financing are available, from traditional bank loans to merchant cash advances and crowdfunding. However, making a mistake in your choice can lead to increased costs and financial strain.
Solution
Consult with your broker about different financing options and their pros and cons. For instance, long-term capital investments may require traditional loans, while lines of credit can better manage short-term cash flow needs. Let the broker help you choose what is best for you based on his knowledge in this field.
Issue #7: Neglecting comparison of different terms
Accepting the first offer of financing that comes your way might not be wise because it could mean less favourable terms or higher costs over time.
Solution
Take some time to compare what different lenders are offering to find the most suitable one. A commercial finance broker will assist you through this process by using their connections within various lending institutions, thereby ensuring that you get the terms that suit your needs the most.
Even small variations, such as fees or interest rates, can significantly affect total cost outlays for funding packages, and therefore, they should not be ignored during the comparison shopping exercise.
Issue #8: Business overleveraging
Overleveraging means taking on too much debt relative to equity, leading to problems with cash flow and ultimately making it hard to meet debt obligations, especially when revenues are low.
Solution
You should always adopt strategic means to manage your debts by avoiding borrowing so much that your company cannot comfortably repay. If equities and debts are not balanced healthily, you might experience acute financial difficulties, especially liquidity crunches. You can ask your broker to analyze your present leverage so that you can maintain a perfect debt level in your business.
Issue #9: Financing timing consideration failure
This can greatly affect the terms you receive and your company’s debt repayment ability. Many businesses fail to determine the exact financing time and look for financing when encountering financial crunches, which automatically results in unfavourable terms.
Solution
Proper planning is very much necessary in this regard. You should avoid looking for financing when you are completely out of funds. With a healthy financial condition, you can always receive favourable terms from your lender.
Here, your broker plays a significant role as they can tell you, based on market conditions and your company’s financial health, which is the most optimal time for you to secure loans.
Issue #10: Loan covenant misunderstandings
During the loan term, many borrowers fail to meet loan covenants including additional borrowing restrictions, operational requirements, and financial ratios. If these covenants are neglected or misunderstood, the borrowers might encounter heavy ramifications in the form of penalties or loan defaults.
Solution
Before you sign an agreement to borrow any loan, you are strongly recommended to go through or review all available loan covenants well.
If you do not understand them, ask your broker to explain the same so that you can learn about the conditions and access their reasonability and achievability. Ensure that the covenants are manageable and can be met by your business.
Issue #11: Ignoring other ways to borrow money
Many entrepreneurs choose traditional financing options for business funding, ignoring other means, but this is not recommended. Nowadays, apart from traditional loans, many alternative options are available in the market, like asset-based lending, grants, and peer-to-peer lending. Your financial chances will be restricted if you ignore checking out and comparing multiple financial options.
Solution
Before finalizing any financing option, you must thoroughly compare the different available options. Learn about the pros, cons, terms, interest rates, and other relevant details to find a suitable one. In most cases, alternative options have more flexible terms than traditional ones.
Issue #12: Fail to receive professional advice
Most businesses think that choosing financing options directly without expert assistance can be quite affordable, but this is completely a wrong perception. If you avoid seeking expert help in this regard, you can miss opportunities and experience costly mistakes.
Solution
Hire a knowledgeable person with sound experience in the industry. They can provide tailored guidance based on your business’s specific nature and financial needs, helping you navigate the complexities of the financial world. Additionally, they can inform you about various attractive deals that may benefit your business. Brokerage platforms like FundOnion can get you in contact with reputable lenders.
Conclusion
Securing the right funding is crucial for any enterprise, yet challenges are inevitable.
By understanding the potential pitfalls mentioned earlier, you can make informed decisions that promote your business’s growth and financial stability. In commercial finance, few can match the expertise of a commercial finance broker in guiding you through the complexities of the field.
Whether you run a small business or manage a large company, avoiding these common mistakes could be key to your future success.
