This is a guest post from Daniela Baker from CreditDonkey.com.
Entrepreneurs can make a profit doing what they love, but that profit only comes with hard work and perseverance – as well as a great deal of financial planning and knowledge.
Many small businesses and microbusinesses fail within their first few years of operation simply due to common financial pitfalls, which are normally completely avoidable.
Here are a three common pitfalls entrepreneurs face and how to avoid them:
Getting the wrong type of financing
Financing can be an issue for entrepreneurs at any time, but when you are running a startup, getting the right type of financing is essential.
The key here is to figure out which type of financing works best for you and your business model. To figure it out, it’s a great idea to speak with a small business counselor. You can even get free counseling that will help you start up and grow your small business.
Here are just a few different types of financing to consider:
- Personal finances: If you have savings, you might consider using some to start up your business. This is riskier because if your business fails, you could wipe out your savings. However, it’s nice because you won’t be beholden to a bank or another lender for how you run your business.
- Bank loans: Bank loans specifically for small business start ups can offer you a low-interest way to finance your small business from the start. It’s a good idea to talk with a bank loan officer at length about the best loan terms that will work for your small business.
- Personal loans: Sometimes you can finance your small business by getting personal loans from family and friends. This can be a good option, as long as these people can understand limits when it comes to the say they have in your business. Walk this line carefully. Often you can get low or no interest loans from friends and family members, but some people might expect to have a say in how you run your business, which can get frustrating.
- Investors: If you have a really solid business idea, you might be able to get investors to help you get your business going. These people will inevitably have a say in how you run your business. However, investors can be a good idea because they can help you finance your business and will only expect to be paid if your business actually turns a profit.
- Business credit cards: These can be easier to obtain than business loans, but they can be a great way to finance the day-to-day operations of your small business. A business credit card can give you some great rewards for your business, and it can be a good way to make sure that you have the necessary funding to pay your business’s bills from one month to the next.
- Crowdfunding: This is a new type of financing that’s particularly great for eco-friendly or social interest small businesses. Essentially, you can use a crowdfunding website to get people to make small donations towards the start of your business. If you’re working with a trendy social or eco-friendly business plan, this can be a great option for financing.
Negative cash flow
When you start your business, you’ll have to dump money into it.
And for a few months – or even a few years – you’ll probably need to re-invest any profits right back into it.
But you can avoid negative cash flow by keeping your expenses as low as possible. This may mean running a business out of your home for a while, wearing multiple hats instead of hiring employees, and using your money as wisely as possible on goods and services so that you don’t end up spending more money than you have.
Not enough insurance
Having insurance for your business is an absolutely must, since you’ll need to be able to cover yourself in case of accident or unexpected financial output.
If you’re strictly working from your home and aren’t seeing clients or customers in your home, you may not necessarily need liability coverage. If you have a store or office where customers come, or you sell certain kinds of products, liability coverage is a must-have. Talk with a few insurance providers to see who can give you the best deal on insurance for your small business. (Note from Heather: When I was selling the baby blankets I invented, I found very affordable liability insurance through a local business. Though they are based in Rhode Island, they can help almost anyone regardless of where your business is located.)
Daniela Baker from CreditDonkey says starting and running a small business can be financially stressful. However, it can certainly be done, especially if you are smart about it. Do your research on different financial options to ensure that you make the best possible decisions for your business.