Successfully running a small business is largely a trial-and-error effort. Ask any small business owner to share their biggest mistakes, and you’ll find that most have a lot to report. We’re here to help you avoid some of the most common banking mistakes small businesses make when starting out.
Borrowing Money Before You Need It
Small business owners can benefit from bank loans, but requesting a loan before you need it can put you in a difficult financial position. Borrowing money without specific goals can lead to the business quickly depleting the borrowed money. Before taking out a business loan, decide exactly where the funds will go and how they’ll help you increase your revenue.
Failing To Review Fees
When you need money, you may be willing to accept it from anyone who offers to lend it to you. No two bank loans are the same, and expensive fees can make it difficult to repay your loans. Ensure you review interest or borrowing fees before agreeing to a loan. These fees are typically listed as an annual percentage rate (APR).
Ignoring Repayment Schedules
Understanding repayment requirements when taking out a bank loan is also important. Taking a loan with a short repayment period may not give you enough time to recoup the funds. Before agreeing to borrow money, consider where the money will come from to repay it and how realistic it is that you’ll have it by that date. In fact, giving yourself extra time can help you prepare for unexpected changes in revenue.
Failing to repay your loan on time or missing payment dates can also ruin your business’s financial reputation. It can also affect your business credit, making it nearly impossible to get credit or lending in the future.
Failing To Consider Bank Advances
On the same note, a cash advance can be a lifesaver if you’re about to miss a loan payment or are unable to fulfill an order, causing you to lose out on earned revenue. A bank cash advance can offer fast borrowing power to get your small business out of a difficult position. Additionally, bank advances tend to be a better and more affordable option than taking out a cash advance on your credit card.
Not Considering Credit Impact
Some banks may issue hard credit inquiries when opening a new account or taking out a cash advance. Too many inquiries on your credit can affect your overall score, which can make it difficult to qualify for business loans later when you may need them. Most credit card advances increase your credit utilization rate, which is an important factor in calculating your credit score. However, online banks sometimes allow you to take a cash advance without impacting your credit score.
Not Taking Advantage of Online Banks
Online banks offer a level of convenience and practicality that traditional banks don’t. Even if you already have an in-person bank you love, you should still have an online bank account for other processes. Online banks can make tracking funds, transferring money between accounts, and requesting cash advances easier. Understanding all your financing options is important to your success as a small business owner.
Co-Mingling Personal and Business Money
When you’re first starting out, it may seem easier to use your personal checking and savings account for your business expenses. However, separating these expenses and income from the beginning can make it easier to keep everything organized. It’s convenient and easy today to open an online savings or checking account that you can use for your small business.
Small business owners will also find that tax season is easier when you keep your costs separate from the beginning. You’ll also find opening business lines of credit or credit cards more convenient when you can easily show your business finances.
Chasing Higher Interest Rates
It may be tempting to continue moving your funds between bank accounts to chase the highest interest rates. However, this can be an inconvenient task that takes up valuable time you could spend on other important business tasks. Instead, choose an online bank that offers a competitive, consistent interest rate and leave your funds there.
Not Structuring Your Business Correctly
How you structure your business can affect your liability and banking options. Sole proprietorship and limited liability company (LLC) are the most common types. Using only your registered business name can make depositing funds more difficult for other employees. Instead, structuring your business as an LLC or doing business as (a DBA) allows you to keep your personal name on your bank accounts. An LLC is also an excellent option if you have multiple business owners.
You’ll learn a lot as a small business owner. Eventually, your mistakes will become valuable learning opportunities. However, a few key strategies, like separating business and personal accounts from the beginning, can help you better manage your business finances.
