We all know that for most people who start businesses it is either necessary or extremely helpful to have access to financing. The lower the cost the better and the more cash-flow friendly it is, the better, because you don’t have any dang cash-flow. Or at least not much since you’re in your first year or two of starting the business.
We’ve worked with and helped thousands of entrepreneurs and small business owners who were in their first 2 years of business and these are the 5 most common mistakes I’ve seen made when it comes to financing and start-ups.
Did You Form Your Entity and Establish Ownership Percentages with Financing in Mind?
When you have a business partner, a spouse, or both, did you think about everyone’s credit profiles when you decided who would be the owners and what percentage their ownership would be? For example, according to Lendio, 59 percent of its site visitors need $50,000 or less for their businesses. Most people don’t need millions of dollars. But what if the majority owner has bad (or not-so-great) credit and his spouse or business partner has excellent credit? There are clearly other aspects to this decision but did you discuss that with your attorney or think about that in forming your entity?
Did you know that with many business loans you’ll need anyone who owns 20 percent or more to be part of the credit check and to personally guarantee the repayment of that loan you want to obtain? Is one of the partners or one of their spouses willing to utilize their excellent credit to help the business get started? If you’re like a lot of people and only need $50,000 to get things started, then did you know you could possibly get all of that with a few credit cards that have 0 percent rates and low monthly payments? Most credit card lenders just require the applicant to own at least 1 percent of the business or to have the authority to borrow on behalf of the business. You will even be better off if you choose the right business credit cards and maintain a separation between your personal and business credit.
Tell your attorney that you can solve your financing issue real fast if Joe’s wife can own 1 percent of the company (since she has the excellent credit) and that you want to figure out how to structure the business so that she is involved for that specific purpose. Remember, that’s one scenario and that doesn’t always work but it’s rarely thought about at the formation stage of the business so do your homework and ask the questions ahead of time and not after you’re in a pinch and the business can’t move forward because you can’t find your funding.
Did You Create a Plan for Your Credit Card Usage?
Since we mentioned credit cards, let’s talk about them. Depending on the source you rely on, anywhere from 60 to 85 percent of small businesses use them. They can be good or bad, probably like most financing solutions. Credit cards offer 0 percent interest intro rates. They provide buyer protection. You can buy now and pay later. There have been many a savvy business owner who has paid little or no interest but has cashed in nicely on the rewards offered … hello gift cards and free travel. No collateral is needed with credit cards, either.
On the other hand, if you don’t plan for when and how you’ll use credit cards they could become a crutch for unplanned spending and maybe – gasp – poor and undisciplined spending that will hurt your company. So don’t be afraid of credit cards because fear doesn’t help anyone make good decisions. Decide how you’ll use them. Heck, the Keybridge Research business credit card study (PDF) from a few years ago even showed that over a 5 year period that for every $1,000 in credit card use by start-up business owners, it resulted in a $5,500 increase in company revenue. Not a bad ROI. Should you live in fear of credit cards? Of course not. However, should you plan for how to use them wisely and think about separation between your personal and business credit? Absolutely.
Don’t Treat Your Investors (Your Friends and Family) Like They Aren’t Important
Your friends and family can be great sources of start-up funding. But there’s a reason why insiders refer to this as the Three Fs: Friends, Family, and Fools. Just because they are a friend or family member doesn’t mean you shouldn’t structure the transaction professionally and that you shouldn’t report to them and communicate with them responsibly.
Think about it like this. Maybe Uncle Louie isn’t Bill Gates or Michael Dell but how would you structure things if it was a business titan who invested their money with you? Would you have a written agreement with them? Would you provide monthly or quarterly reports to them with real data and not just a fluffy letter that avoids the bottom line production? There are tools out there like Zimple Money. Use them. Treat your Uncle Louie like the investor he is. Show him the respect he deserves. It’s not only the right thing to do but you might find that it makes you a better leader in the process.
Doing Nothing About Your Credit
I mean this one. You formed your entity. You labored and scoured the internet over whether you should have an LLC or a C-Corp. You put together an impressive business plan. You found a bank and even researched which bank would be best for you to use. You’ve spent hours planning and talking to people about your awesome and amazing business. Then when it comes to your credit you did nothing. Nada. Zero. Zilch. Goose eggs.
Really? How did you think that business loan application was going to work out for you?
In the early stages of your business your character and credit might be the only thing a lender can look at or cling to. Don’t strike out before you get to take a few whacks at it. Learn about treating your credit as an asset. It’s okay if you don’t understand credit. It can be intimidating but it’s really not rocket science. Remember this, there’s only two ways you can improve a credit profile. You can add some good stuff or correct and remove some bad stuff. There’s a lot that goes with each of those but don’t let it become more complex than it is. If you learn the basic differences between FICO scores and FAKO scores you’re on the right track!
Not Knowing Your Best Start-up Financing Options
It all starts with knowing your options. Then, once you know your options, it’s much easier to make a decision and proceed with confidence. As Theodore Roosevelt said, “in any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” Check out these financing options for start-up entrepreneurs if you aren’t sure.
It’s never too late to course-correct. It’s okay if you didn’t think through some of these aspects of your business. Learning and taking action is what running a successful business is all about. Best of luck to you and let us know what we missed.
Frustrated Photo via Shutterstock
Thanks! That was really informative. I would like to see more articles like this. Most of the startups struggle with the money.
Financing will always be a sensitive issue that needs to be discussed and decided on early on. You cannot make mistakes in this part as it will cause you a lot of headaches if missed.