Financing options vary with every company and industry. There are 5 areas in business that many owners make frequent mistakes in. Lets take a look at these financial errors and how to avoid them for your future endeavors.
- Most people do not know how to calculate their interest rate. For instance, if you borrow $1,000 and pay $1,100 within 3 months with weekly installments, most people would assume your interest rate is 10%. But that is simply not true. The time frame tell you otherwise, and your interest rate is actually around 80%. That’s a huge difference that most people fail to catch on to. This mistake happens all too often because most businesses calculate APR as total fees divided by the amount borrowed. Instead, they should be calculating the interest based on the amount outstanding at every point in time. Take the time to be aware of your actual interest and take the adequate measures to make it right.
- Hidden fees can come as a huge blow for small businesses. When you are deciding to take out a loan or finance, origination fees might sneak up on you. Be aware of the fact that many lenders charge origination fees around 3%-4% which are deducted from the loan amount. For example, a $30 fee on a $1,000 loan is really 3% and this will immediately skew your real APR. You could easily compare this to an ATM fee. When you plan to borrow money, understand the fees that come with the capital. Many fees, such as, administrative, application, contract fees, are usually hidden within the contract. Make sure you read it thoroughly and are accepting of the terms.
- It is no secret that banks take way too long to approve a loan. After the application process is complete you must wait two weeks for approval and another month or so just to get the money in your account. For small business owners, that’s a lifetime and many opportunities can go unchecked because of a lack for funds. So instead of waiting around for a bank approval, take the time youd be spending waiting and spend it generating sales and growing your business. The lowest APR isn’t always the best choice when you need the money now in order to grow. Private lenders might have higher APRs but they provide quick solutions and help you grow your bottom line faster. Time is money, and if you are looking to increase workload or buy inventory, a bank loan might not be the best bet. Lenders can move quickly and expedite application processes so you can worry about making money, not waiting to borrow it.
- As a business owner looking to take out a business loan, you must know the difference between a short-term and long-term loan. Many times, companies that are in need extra working capital borrow small loans and pay them back quickly. In these situations, the actual interest rate is the not important. The goal is to have sufficient capital to cover your business short term in order to grow exponentially. Don’t let small size of the loan get you and stay informed on what you are actually paying for it. Asses all costs, fees, parties involved, and payment term.
- When you give a customer a discount you might actually end up financing more than you bargained for. For example, if you let customers pay you with a credit card, you are essentially incurring a 3 percent financing fee to grant them 25 days to pay, since that is the “float”, or grace period of most credit cards. That is almost a 50 percent APR. Make sure the type of discounts you are giving out do not affect you more and are right for your type of business.
Financing is important for all new businesses but very often misunderstood and can end up hurting rather than improving your business. As time goes by, it is your job as a business owner to gain more knowledge about what benefits and what hurts your business.