5 Common SME Financing Mistakes To Avoid
5 Common SME Financing Mistakes To Avoid

SME or Small and Medium Scale industries which cover the major part of an economy mainly suffer due to financing problems. While on the one hand, financial institutions are critical to financing these companies; on the other, they make financing mistakes on their own. Often SMEs are seen borrowing money at the wrong time from the wrong source and finally ending up in the pool of debt. Due to these financing mistakes, many opportunities are lost, and many enterprises have to close down.

Now every company is not the same, and thus their right choice of finance is also different and so are their financing mistakes. Here are some of the common and most deadly financing mistakes by the SMEs.

  1. Understand the real interest rate on your borrowed funds: Often we only calculate the APR (annual percentage rate) which is total fees on loan divided by the amount of loan. When we should calculate the interest on the amount which is outstanding after each installment. It is called the amortized amount, and this amount can make a difference of a few times of the interest rate mentioned in the loan documents. So, the real interest rate is always higher than what we see and calculate. Thus if the finance is not for any necessary purpose like expanding the business, grabbing opportunities or similar, it is better to avoid taking loans all the time for minor business events. This unseen interest rate will make you lose out your profit which will continue to compound which is not good for any business. So, whenever availing a loan for your business, carefully calculate the real interest rate rather than applying the mentioned interest rate.
  2. Don’t try to finance your business without planning it: Whether you are starting out your new business venture or expanding the old one, you need a business plan. Without a sound plan for your business ideas, you won’t be able to approach the financial institutes for financing your business. If you don’t have one perfect plan which conceptually and realistically portrays your insights for your business, no funding company will invest in your idea. You need to have all the financial forecast for your business projects over at least coming three to five years. You need to also establish the viability of the business venture according to the market scenario. And your business plan should be legitimate as well.
  3. Have you done your research on funding? - The funding industry is expanding with time. Earlier for financing your business, you needed to approach the banks or the government institutes, but now there are several individuals or private funding companies and investors. For instance, the venture capitalists are there to fund the best business ideas which they anticipate to generate huge income after few years. For the startup SME companies, angel investors are also there for funding against shareholding of the company when it booms. Often SMEs get stuck at getting finances because they don’t explore this market.
  4. Do you know how many funds you require? -  Most of the time, it has been observed that the businesses either over or underestimate the number of funds required. This makes the business incur losses. If you have taken the loan of an amount more than your required amount, you will be paying extra interest on the same. This extra interest will be deducted from your income which is a loss. If you underestimate the amount of loan, then the business opportunity might be lost due to a deficiency in production due to a shortage of fund. So, it is really important to estimate the right amount of funding your business requires at a certain point in time. If you are not that confident, you can take professional help like from a Chartered Accountant or a CMA. They can analyze the exact amount of funding required for your business venture/new projects.
  5. Choosing the wrong source of funding: The most deadly mistake can be choosing the wrong source of funding. If you choose the wrong financial institute, it might keep you waiting for a long time for the approval of the loan. The loan might get approved when the opportunity has already been lost. Secondly, the hidden charges can ruin all your hard work and take away all the profits. There are different hidden charges on business loans, like fees for early prepayment, part payment of loans etc. There are also many issues with the collateral securities which can hinder the processing of the loan on time.

SMEs though play the pivotal role in building an economy; they face most of the hurdles while seeking funding. It is tough to get funding for SMEs; thus you should not leave any stone unturned for making the cut. Without making these five financing mistakes, it can be easier to avail funding.

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SME Finance, SME Finance, SME in India, SME in India, SME Company in India, SME Company in India,

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