What Is a Common Weakness in Small Business Financing?

Lack of preparation is among the most significant weaknesses in small-business financing, and it’s a weakness with multiple components and potential negative outcomes. Small businesses typically run on tight budgets with slim profit margins, and startups, in particular, may find it difficult to gauge financial needs in the early stages of operation. Research, planning and preparation can help eliminate some of the most notable pitfalls.

Even with in-depth research and market analysis, small businesses are subject to market fluctuations and changes in the economy. While there’s no way to pinpoint exact expenses and earnings, anticipating potential money challenges and planning for various outcomes can help improve a small business’s financial outlook. This includes developing a comprehensive business plan that details anticipated startup and operating costs and calculates when a business is expected to start generating revenue.

Sometimes financial problems that arise within a small business can be directly attributed to the business owner’s lack of experience. While every business comes with a number of learning curves, a failure to become educated about basic budgeting and financing in your industry can jeopardize your company. This includes learning how to anticipate realistic operating expenses, distinguish one-time versus ongoing costs and assessing the need for adequate backup reserves. It also involves using an effective accounting system to track revenue and expenditures.

Savvy small-business owners understand the importance of planning for the worst as well as best outcomes when it comes to business operations. Failure to do so can become a liability. For example, a late shipment or a major client loss could derail a business that has no financial contingency plan in place. Likewise, a rush demand for your product or above-average growth also can be detrimental if your business is not financially prepared to order additional inventory, add staff or expand facilities.

Without pre-established, solid financial resources to draw from, a business is in a precarious position. If your business needs financial padding to make it through a slow period or to invest in essential new equipment, having no backup financing becomes a major obstacle. The opportunity to take advantage of a great new business opportunity also falls by the wayside when there are no resources to draw from. This weakness can be reduced by identifying appropriate funding sources before the financial need arises.