Let’s be honest: most small businesses fail within three years. Since the great financial crisis a few years ago, financial institutions and credit lenders have been extra cautious when providing money to startups because of this very fact: they’re too risky and the entrepreneur could fail paying the money back to the banking establishment.
Ostensibly, a strong majority of businesses in any field is failing for a variety of reasons. But the biggest factor to the success or bankruptcy of an enterprise is business funding. If the business owner is financially prudent and careful minding the pennies while also being an innovator, then the company can flourish. However, if the proprietor is horrible with money, disorganized with the bookkeeping, and just wants to work for himself because he doesn’t want to wake up at 6:30 a.m. on Mondays, then there is a very good chance the business could flop.
Finding and receiving financing is something that is very difficult to achieve for most small businesses. Unless you’re in Silicon Valley and close to the money pumping scene of the Federal Reserve, your minuscule retail establishment, café or accounting firm will have to jump through hoops to attain the necessary funding.
If you have already garnered capital from the bank or investor(s), then here are seven business funding mistakes that all startups should avoid:
1. Credit Dependence
Many financial experts aver that a consumer can be quite dangerous with credit. Well, a business owner can be just as reckless, because owning a business comes with a lot of bills, investments, expenses and repairs. If your company has received a small business loan and a line of credit, and you have a $25,000 credit limit on your personal credit card, then be very aware of your financial situation.
In other words, when it comes to hiring staff, buying equipment or employing a detailed marketing plan, do not rely too much on your credit. This is where excellent accounting skills come in to play because you have to separate revenues, cash flow, debts and profits into different categories.
2. High Interest Payments
Now that you have achieved getting a business loan, you can move ahead with expansion plans or installing the latest technology. However, after reviewing the fine print, you’re now paying excessive interest charges and hidden fees that are seriously diminishing your opportunities of making a profitable business. In fact, these interest payments and fine print charges are eating up your monthly revenues. Always read the fine print.
3. Personal & Business Account Merger
Either business is going well or it’s performing inadequately. In either case, if you lack the proper accounting skills, it’s likely you’ve merged your business and personal accounts into one (indirectly) by taking money from your personal assets and placing it into your business. This is a hazardous move, particularly if you have a family, a mortgage payment and a vehicle.
4. Zero Cash Reserves
You’ve run out of credit, a flooding has just happened in the basement, and the only money you have left is in your personal savings account. This is what happens when you set aside zero dollars into your cash reserves. Whether it’s covering a short-term expense or paying staff members during down periods, it’s always a wise move to have funds in your emergency enterprise account.
5. Minimal Compensation
At the start of a small business, it’s wise to give yourself a lower income because any profits are being put back into the endeavor. However, this could prove harmful because then you don’t have any cash to pay the rent, buy groceries or keep up with your water bill. Pay yourself, but be smart about it.
6. Overestimate & Underestimate
We think we’re smart and excellent forecasters, but humanity has proven this wrong repeatedly.
In your case, you’ve underestimated variable costs while overestimating future revenues. Moving forward, do the opposite: overestimate your variable costs and underestimate all and any revenues. This way, you’re prepared for the worst, and when things go well, you can give yourself a pat on the back because you’ve now exceeded all expectations.
7. Chasing Investor Funding
When owning a business, it can appear that all you’re doing is looking for new sources of funding, especially if the company is doing well in terms of sales and profits. With that being said, you shouldn’t actively seek out business funding from venture capitalists, angel investors and peer-to-peer lenders. Instead, take a modest approach and focus more of your time on the business side of things.
"Many young entrepreneurs think that raising VC money is a measure of success,” says Brian Garret, co-founder of StyleSaint and Venture Capitalist. “There is a lot of money chasing bad ideas. The only thing that matters is building a viable, growing and profitable business."
Small businesses are the backbone of any civilized, industrious and prosperous nation. In the U.S., 90 percent of the country is based upon the concept of small- to medium-sized businesses (SMBs). If you think you have a great idea for a business and you have the skills to properly run one then do it, but always keep an eye out on the financial side of your enterprise.