If you’re like most entrepreneurs, you’re first and foremost a business owner – not a financial whiz. While you know finances are at the core of small business success, it can be tempting to put financial issues on the back burner to focus instead on everything else on your busy plate. This is a huge mistake many otherwise savvy entrepreneurs often make. Before you know it, what could have been an entirely avoidable financial hurdle is now a mountain of money troubles for your organization.
While finances might not be your favorite part of running a small business, understanding the ins and outs of spending, borrowing, distributing, and making money is critical. Don’t let this overwhelm you. Many common reasons a small business owners can need financial help are surprisingly simple to avoid. You need to know what those missteps are and how to overcome or stop them entirely.
From misunderstanding the small business loan process to funneling cash flow into the wrong places, let’s explore the most frequent mistakes business leaders can make so you can take deliberate actions against making the mistakes yourself. Armed with better financial advice, knowledge, and awareness, stop these potential money problems before they start and set yourself up for the success you deserve.
1. Not Setting Up a Proper Rainy Day Fund
When it feels like business is great and only sunny skies are to come, it can be tempting for small business owners to neglect — or even completely put off — building an ample rainy day fund. Instead, it can feel right to heavily invest in areas like marketing, employee growth, larger facilities, or inventory vs. setting aside a pot of money that might never be needed.
While prioritizing those investments may feel smart in the short term, they won’t mean much when an unexpected disaster strikes, and significant cash flow quickly evaporates. If you failed to funnel enough into an accessible rainy day account, your recently booming small business can dry up in no time.
The most educated, organized, and fiscally responsible entrepreneurs understand that the best financial planning accounts for the unexpected. From shifts in the marketplace to surprise PR nightmares to unprecedented world events (you remember March 2020), even the strongest enterprises can nosedive overnight. And if that happens, those in charge must have access to enough finances to stay afloat, or risk losing everything.
We’d all like to think that business can only go up. But owning a business is inherently unpredictable. Even if every bit of data forecasts record-setting profits to come, business owners must be financially prepared for anything.
2. Failing to Pay Your Payroll Taxes On-Time
Nobody likes taxes. So, it’s understandable why some business owners want to put off those payments for as long as possible. For “smaller” monthly or semi-weekly payroll taxes, which are paid separately from income tax payments, it can be even more tempting for smaller organizations to postpone payments. This is always a mistake, even if you promise you’ll pay up soon. Instead, always pay on time and if you’re in a crunch, small business loans can help you meet your financial obligations without angering the Internal Revenue Service (IRS).
Payroll taxes typically consist of a calculated percentage of an employee’s income that is withheld from the employee’s wages. Employers must send those tax withholdings to the government, which goes off to fund programs like unemployment, Social Security, and Medicare. While important, many business owners think that if they’re up to date on their income taxes, the IRS won’t come knocking anytime soon for the payroll tax. Why not wait a month or two and put that money elsewhere in the business for now?
Once again, the small business world is unpredictable. The money you assume will be there next month could evaporate or be needed elsewhere. Soon, what was one month behind becomes two months, and then six! Now, you have a problem. Companies behind on payments can quickly start racking up serious fines, penalties, and fees by neglecting to meet their payroll tax obligations, often requiring significantly more loan debt and the interest that often comes with it. That’s on top of the initial taxes you put off paying. In extreme cases, authorities can claim or seize your business and personal assets to settle the debt. Now, those “smaller” monthly payments are having a significant financial impact on your business — and one you may no longer be able to escape from.
3. Losing Track of Marketing and Advertising Spend
As a small business owner, you likely have a small marketing team to go with it — if you have a marketing team at all. However, you need to attract and convert new customers to your brand, so you pay for a few sponsored Facebook posts here, buy some LinkedIn ads there, and send a run of mailers to prospective buyers. In theory, these are fantastic and accessible small business marketing initiatives. They can also lead to wildly out-of-control spending in no time flat.
With so many exciting and innovative marketing options available, it can be tempting to try out a new marketing initiative or experiment with a trending social media channel. Just remember that every piece of marketing and advertising costs money — and this includes costs of labor.
Keep advertising costs in check by carefully reporting, analyzing, and understanding how you’re funding advertising campaigns, exactly where your advertising money is going, and the ongoing return on investment (ROI). That said, an advertising budget is vital for the success of many small businesses, especially those seeking greater visibility in a crowded market. Don’t mistake this advice for avoiding ad spend altogether. Instead, be precise, attentive, and data-driven — and if you’re too busy to keep up, consider adding a new (or your first) part- or full-time marketer to the team.
4. Applying for the Wrong Type of Business Loan
Small business loans are far from a “one size fits all” situation. After all, running an organization is complex and every business is unique. This makes finding the right small business loan to fit your needs something to be carefully considered before applying for or accepting a loan. When deciding on the kind of small business loan to get, think about factors, including the specific need(s) for this loan, the overall financial health of your company, how much money you need, how quickly you can pay back the loan, and more. Also be sure to consider aspects like interest rates, fees, loan eligibility, and repayment options. These all may play a factor in which business loan suits your specific needs, or if you should apply for one at all.
Here are three common loans for small businesses to consider:
Short-Term Business Loans
These loans offer access to capital over a shorter duration of time compared to more traditional loans which typically last longer. Short-term small business loans are ideal when organizations seek fast approval, quick repayment options, and flexibility in how to use funds.
Working Capital Loans
For companies seeking to stabilize cash flow, a working capital loan can be a great option. These loans excel at temporarily covering your typical operational expenses, often including employee payroll, paying monthly bills, and stocking inventory.
Business Bridge Loans
Typically used in real estate but useful for companies across all industries, bridge loans for small businesses help organizations “bridge” financial gaps for a short amount of time. For example, if you want to lease a larger office and need to make a hefty down payment but cannot access enough funds until you stop paying for your smaller space, a bridge loan can provide the money needed while you make the switch.
Choosing the right business loan can be challenging but it’s essential for the long-term success of your organization. Be sure to do ample research before applying for a loan, consider talking to a loan professional for advice, and reach out to a reputable loan company specializing in small business loans to ask all the right question.
If you’re ready to find the right small business loan match for your business, contact the experts at SmallBusinessLoans.com. Our team is committed to finding the perfect financing solutions to support your unique business goals so you can succeed and grow.
About the Author
Joe Valeo has over 37 years of experience in finance and sales. His leadership and expertise have served financial services and alternative working capital organizations such as LendingPoint and Capital Access Network, where he oversaw the growth of more than $5 billion in capital for small businesses. He also led sales strategy and management at First Data Corporation and Visa. Joe oversees SmallBusinessLoans, where he strives to make lending more accessible for small business owners.