The nonprofit small business lender LiftFund has helped thousands of small business owners navigate the funding landscape, and they’ve noticed some common pitfalls along the way. These are the three biggest mistakes LiftFund lenders have seen new business owners make – and how you can avoid them.
Not Understanding Your Financials
When you sit down with a potential lender, get ready to answer thorough questions. If you find yourself fumbling for answers about your profit margins or cash flow cycle, you’re not the only one.
Why it’s a mistake:
Lenders want to see that you understand your business’s financial health. It’s not just about having good numbers – it’s about knowing what those numbers mean. When you can confidently discuss your profit and loss statement, cash flow, or debt-to-income ratio, you’re showing that lender that you’re a lower-risk investment – even if it doesn’t look that way on paper.
What can happen:
- No proof of financial viability raises red flags
- Loan denial simply because the lender perceives higher risk
- Frustrating delays while you scramble to fix errors or gather missing information
What to do:
Keep updated financial statements on hand (profit and loss, balance sheet, and cash flow statements) and review them regularly – even if you work with an accountant. Set aside time each month to understand what’s happening with your money. Think of it like checking the vital signs for your business’s health.
Applying for the Wrong Type of Loan
Not all business funding is created equal. Be sure to do research and understand that not all lenders have your best interests in mind.
Why it’s a mistake:
Business loans are tools in your toolbox, so apply for a loan product that fits your need. Longer-term loans for shorter-term needs may hurt your books more than help them. Worse yet, in the rush for cash, you might stumble into a predatory lender’s trap, where sky-high interest rates can undermine your business and even force it to close.
What can happen:
- Wasted time and energy pursuing inappropriate funding options
- Higher interest rates or fees than necessary for your situation
- Taking on debt with repayment terms that don’t align with your cash flow
What to do:
Match the loan to your specific need. Need to cover occasional cash flow gaps? Consider a line of credit. Planning a major expansion or equipment purchase? A term loan might be more appropriate. Do your homework on different funding options before applying, and don’t hesitate to ask questions. At LiftFund, we’re always happy to help you understand which option best suits your situation.
Poor Documentation or Lack of Preparation
Success in business often comes down to preparation, and funding is no exception.
Why it’s a mistake:
Lenders require a package of documents to evaluate risk – things like tax returns, business plans, financial projections, and legal documents. Walking in unprepared not only delays the process but can signal to lenders that you might not be organized enough to handle their investment. Additionally, mixing personal and business expenses creates confusion and makes it harder to present a clear financial picture.
What can happen:
- Incomplete applications that get rejected or stalled in processing
- Damage to your credibility as a business owner
- Lower chances of approval in the future if you develop a reputation for disorganization
What to do:
Create a digital or physical “loan-ready” folder to have key documents always on hand. This is your business licenses, financial statements, tax returns (2–3 years), bank statements, business plan, and personal financials. You’ll not only be ready for loans, but for grant applications, too. And one of the simplest, yet most important, steps: Create a separate bank account exclusively for your business transactions.
Seeking funding is a normal part of growing your business. Even entrepreneurs make mistakes sometimes, but being aware of these common pitfalls puts you ahead of the game.
LiftFund is a nonprofit community lender that offers opportunities to diverse small business owners and entrepreneurs across 13 states. Its clients are diverse: 83 percent are minorities, 38 percent are women, 10 percent are veteran entrepreneurs, and 63 percent have been in business for less than 5 years. In addition to offering loan products, LiftFund has online support services and several Women’s Business Center locations in the Southwest.
Article courtesy of LiftFund.