7 Common Mistakes to Avoid When Seeking Business Funding

Posted at August 17, 2020 » By : » Categories : Business Funding »
business funding

Our future is uncertain. The economy is in shambles. You know what that means: it’s time to start your new business!

Surprising as it sounds, now might be the best time to launch the startup you’ve been dreaming of. Credit expectations are at an all-time low, and many mass-scale retailers are closed to the public. This is exactly the kind of environment where self-owned businesses can thrive.

That doesn’t mean your startup will be challenge-free. You still need an eye for detail and business sense to succeed. This is especially true for the first (and, arguably, most important) step of the startup process: finding investors and loans.

To help you take advantage of this unique period of human history, here are 7 of the most common mistakes you should avoid when seeking business funding.

Mistake 1. Failing to Research Your Business Funding Options

Applying for business funding isn’t a one-size-fits-all process. There are a variety of funds you can solicit, each designed to address a specific business need. Choosing a source of funding too quickly can seriously limit your options or even get you into financial trouble in the long run.

First, determine whether you’re going to go after investors or lenders for your primary source of funding. Investors will give you more money up-front at the cost of owning a small percentage of your company’s shares. That also means giving them some of your executive control. Loans are more straightforward but accrue interest over time, meaning that you could eventually end up paying more money than you received.

It’s also important to note the variety of different business loans. Startups usually rely on Small Business Administration (SBA) loans, but they aren’t your only option.

Mistake 2. Giving a Bad Pitch

The process of applying for funding is loaded with difficulties, even after you select the best lender to apply to. The largest of these difficulties is creating your business pitch.

You might think, the more details you include, the more likely your investor or lender will be to provide funding. That isn’t accurate. Investors and lenders usually want a high-level overview, not a blow-by-blow of your entire plan of operations. Summarize what service(s) and/or product(s) your company will provide, your target customer(s), and the metrics you’ll use to measure success.

You might also want to include personal details to appeal to their emotions. These include the reason you’re starting your own business and the vision you have for its future.

Mistake 3. Signing Without an Attorney

When you’re tight on cash, hiring a lawyer to represent you and your business might seem like an unnecessary expense. Trust us: it’s not.

Even though the reason you’re seeking business funding is a lack of personal funds, you really can’t afford to cut corners with legal matters. Although lenders and investors have a vested interest in behaving ethically with potential business partners, they’re still businesses in their own right. That means they’re still trying to make the largest profits and savings possible. Hiring an attorney before you start soliciting funding will keep you from getting the short end of the stick.

Mistake 4. Waiting Until the Last Second to Seek Business Funding

No source of business funding magically shows up as soon as you sign the paperwork. While some loans can hit your bank account in as few as 3-5 business days, most small business loans take an average of 3 months. If you wait until the day, week, or month before your grand opening to solicit funding, you’ll find yourself in dire financial straits.

Mistake 5. Blowing Your Budget on Ads

For new companies, one of the biggest hurdles is spreading the word about what products and/or services you offer to get customers in the door. Many startup owners panic over this and give in to the temptation to overspend on advertisements.

Ads are important, but you should hold off on launching crazy marketing campaigns. Start with a few cheap local advertisements and social media. Hitting the right demographics on Facebook, Instagram, and even TikTok can be more efficient and cost-effective in the long-run.

Mistake 6. Failing to Set a Business Funding Plan

Spending too much money upfront on ads can be indicative of a bigger problem. Specifically, it suggests that business owners failed to establish an effective business funding plan.

You don’t have to specify where every single cent of your funding will go. Variable costs, like the cost of labor and raw materials, make up a significant portion of any business’s monthly expenses. That said, you should try to make reasonable estimates based on current financial data. If you’re a brand new business, this means researching competitors’ spending habits. If you’ve been up and running for at least a few months, reviewing your previous expenses will suffice.

Mistake 7. Forgetting about Hidden Fees

Business loans almost always contain hidden fees related to the labor that goes into processing a loan. Examples include filing fees, origination fees, and administrative costs for contract couriers, etc.

What this means is that the final amount that you receive in the loan will be less than what you see on paper. If you fail to take this into account, you could easily find yourself strapped for cash within a few weeks or months after closing on the loan.

Starting a Business in the U.S.

If you’re looking to start a business in the U.S., you don’t have to go it alone. Your FundingTree is here to help you through the hardest part of getting your company off the ground. Send us an email or give us a call today to find out more about your business funding options.