Statistics show that almost half of small businesses never make it past the five-year mark.
Reasons vary—some underestimate the cost of starting a business and keeping it afloat, they may incur too much debt, or they fail to secure a needed loan since they don’t seek the help of a business loan consultant or their credit rating is too poor to even qualify.
Apart from underestimating business costs and not seeking help from a business loan consultant, below are other common mistakes you should avoid if you wish to make it past the five-year mark.
Overlooking your personal credit. In the creditor’s eyes, poor personal credit rating can be a clear indication that you don’t handle your personal finances too well. More often than not, they would assume you are not any better when it comes to your business finances.
In other words, if you want to increase your chances of securing a business loan, you should aim to maintain a favorable personal credit score.
To achieve a good personal credit score, make sure you pay your obligations—car loans, credit cards, mortgage payments, etc.—on time. Your payment history makes up 35 percent of your total credit score. Your credit utilization on the other hand makes up 30 percent of your score.
As a general rule of thumb, it is recommended to keep your credit utilization to below 30 percent. For instance, if you have $10,000 available credit, make it a point to keep your debt at $3,000 or below.
There are instances however when your credit score is affected by erroneous entries on your credit report. To keep this from happening, double check your credit report and dispute any errors you find. This may entail both time and effort from your part but it will be worth it as your score will surely improve.
Not having a line of credit. As a business owner, it will work to your advantage to always prepare for any emergencies. Equipment can break, the roof can leak, the plumbing can get busted when you least expect it.
Apart from the inconvenience, your lack of preparation for those kinds of emergencies can affect the productivity of your employees. Suffice it to say, having access to extra funds should be considered a must.
Unfortunately, many business owners realize too late that waiting until the moment you need cash is definitely not smart. What if you are denied financing? What if it will take several days before the funding is approved? To play safe, it is recommended to take out in advance a revolving line of credit.
A business line of credit can give you access to cash that you can borrow as soon as you need it. Oftentimes, you can borrow and repay, you just need to be mindful that you do not exceed the credit limit set. This setup can come in very handy in case of emergencies. It can also help you effectively and more easily manage cash flows.
Combining business and personal finances. Just like water and oil, your business and personal finances do not mix. Combining them is no doubt one of the biggest mistakes you can make as a business owner.
There are many reasons not to mix your personal and business finances, some of which are the following:
- It makes it very difficult to track your business losses and profits. In addition, tracking expenses and budgeting can become a nightmare.
- In most instances, creditors will ask for a separate income and bank statement to accurately gauge the financial standing of your business. If you combine your personal and business finances, you might also end up giving the creditor the impression you do not really take your business that seriously.
- Mixing your personal and business finances will also make it challenging to identify legitimate business expenses from the personal ones. You will also find it difficult to calculate proper business deductions once tax time comes.
Spare yourself from all the trouble and inconvenience by keeping a separate business bank account for your business transactions and never use your business credit cards for personal transactions.
No doubt about it, it will take a lot of things to keep your business afloat. However, as long as you know what to do and what mistakes to avoid, your business has a bigger chance of not just staying afloat but thriving as well.