In the midst of all the excitement and effort surrounding the start of a new business is one of the most essential building blocks: startup financing. Yet, many aspiring entrepreneurs get this part wrong and in doing so, they cause significant damage to the business and even to their personal assets and credit.
Below are 7 of the most common startup financing mistakes that entrepreneurs make as well as some tips on how you can avoid them within your own business:
1. Mixing personal and business accounts. Even if you are your business, and even if you will be relying on personal assets to help fund your business development and operations, keep your business accounts as separate as possible from your personal ones. This means having separate bank accounts, separate credit cards or other lines of credit, and maintaining detailed records of any personal funds invested in your business. If you are running a sole proprietorship or a straight partnership, then even with this separation, they’ll still be some overlap in your personal and business financial profiles, but it will still prevent you from many potential problems down the road.
2. Not putting enough money aside to cover personal expenses. When you start your business, you want to be in a position to make sound, long-term oriented decisions. But, this often means that you won’t see much of an income at the beginning. If you are desperate for money, you’ll be more likely to make decisions that may provide some short-term gain, but may cost your business in the long-run. So, before you quit your job to start your dream venture, make sure you have enough money set aside to cover your living expenses for the first 6 months to a year. If that’s not possible, then it may make sense to keep your job and make the startup process slower.
3. Not being realistic with time needed to become profitable. Right on the heels of the point above is the fact that many first time business owners fail to appreciate the amount of time and effort needed to really get a business up and running and generating some significant revenues. This is a major mistake than can lead to a number of other bad decisions, some of which are mentioned below. You should plan to not be profitable for the first year at least.
4. Not sticking to a budget. As I mentioned above, getting to the point where your business is generating profits may take some time. So, it is vital that you create and stick to a startup budget that covers at least the first year of operation. This will help to ensure that you spend money where it’s needed while avoiding spending more than your means.
5. Not properly estimating the costs of startup. Nothing in life or business always goes according to plan. In fact, most times it doesn’t. Yet, many aspiring entrepreneurs assume that everything will be smooth sailing with their startup process. Make sure you budget in extra funds to cover any “surprises” along the way.
6. Taking on too much debt. Even with the most well thought out business idea and plan of execution, there are no guarantees. Taking on a high level of debt in the hopes that future sales can be used to pay it off, can be very risky. It’s often better to start off small, start generating some revenues, and then slowly finance your future growth.
7. Not paying for professional advice and assistance. If there is one area where you really don’t want to be skimping, it’s in hiring a good account and lawyer. I know these professional services can get pretty costly, but if you’ve made the effort to hire good people, you will get more than your money back from implementing their advice and avoiding costly mistakes.
In short, if you really want your new business to be a success, you should make sure you are making the right moves in the most obvious areas, such as startup financing.