Entrepreneurs and would-be business owners are almost always super passionate about their careers. The problem, however, is that passion doesn’t always translate into cold, hard dollars.
And needless to say, funds are often needed to get that dream business off the ground or to sustain it financially.
Having run two of my own businesses for the past decade, I can say with certainty that there are some tried-and-true strategies to help build your business on solid financial footing. But there are some pitfalls and mistakes you should avoid.
Here are 5 dos and don’ts that all you current and aspiring entrepreneurs can use as a guide to financing your business.
Manage your credit wisely
At some point or another, every business owner is going to want or need capital. You might seek a loan from a credit union or bank. You may want a credit card in your business name. Or you may consider tapping the equity in your home in order to start or grow your business.
For all these options, you’ll need to have a good personal credit rating. Most lenders require a personal guarantee for business loans made to entrepreneurs–particularly when the loan is being made to a start-up firm or a company in the early phase of its history.
To boost your credit score, always pay all your bills on time, keep your credit card debts as low as possible and only apply for credit when you truly need it.
Fortunately, a growing number of women are doing a good job of managing debt. In fact, according to Prudential’s “Financial Experience & Behaviors Among Women” study, 33 percent of women gave themselves an “A” when it comes to handling their debts. That’s good news for those women who dream of becoming their own bosses.
Have some skin in the game
Before you go asking anyone else for loans, credit or an investment in your company, you’d be wise to have some of your own skin in the game. Lenders, banks and investors like to see that you’ve poured your own resources into a business. Those resources can range from the time and energy you’ve devoted to your company to the money and direct investments you’ve sunk into it.
Being financially vested in your company’s financial success is a strong signal of your long-term commitment to the enterprise. It sends a good message to potential third parties who might be inclined to economically support your business.
Have a Financial Plan B
Too many entrepreneurs are so gung-ho about their business that they forget to have a financial back-up plan. This can be a huge mistake.
Carefully think through everything from your sales projections to your future business expenses.
Are your numbers realistic or are you simply grabbing figures out of thin air because they’re what you’d like to see or they sound good on paper?
To get a more accurate assessment of future revenues, examine sales for the past three months and then annualize sales based on norms for your industry. Also, benchmark yourself against the competition and give yourself time for feasible growth. Then go back and make a new set of projections.
This time around, consider how you will operate and what you will do if your numbers don’t work out as anticipated. How long can you go without new customers?
Also, would you make different decisions, such as hiring temporary workers or part-time employees instead of full-time staff, if you predicted that your cash flow might be far less than expected?
You’re not sabotaging your dreams or “being negative” by having a Financial Plan B. It’s important to run various “what if” scenarios and then plan accordingly.
Don’t spend money excessively or prematurely
If you’ve just started out or you’re launching a new product line, it’s tempting to want to spend a lot of money to win visibility for your company. But you don’t have to go out and get brand-new brochures, slick business cards, a custom-made website and T-shirts with your company logo all at once.
What if you change your mind about an image or a name? You may have wasted thousands of dollars on marketing materials you can no longer use.
Ditto for equipment and supplies. Before making a commitment to buying expensive machinery, merchandise and other costly tools, make sure you really need them. You may be able to rent, rather than buy, certain items.
Preserving your cash in the early phase of your business–and even when you’re further along in growth mode–is a wise way to keep your company afloat when times get lean.
Don’t take unreasonable risks
Entrepreneurs tend to be bigger risk takers than people with corporate gigs or 9-to-5 jobs. After all, you have to be willing to roll the dice just a bit if you’re going to take the plunge and make the leap from employee to entrepreneur.
It’s one thing to take smart, calculated risks in order to pursue a business dream; it’s another thing entirely to take foolish “bet-the-farm” type of risks.
So think long and hard before doing things like spending every last dollar of your savings or putting up your house as collateral with the “hope” and expectation that a business venture will work out. You can be aggressive, but don’t completely throw caution to the wind.
By following these 5 dos and don’ts, you’ll increase your chances of financial success when you launch or expand your dream business. Good luck!
Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, speaker, and author of 15 money-management books, including the New York Times bestseller Zero Debt: The Ultimate Guide to Financial Freedom.
Lynnette has been seen on more than 1,000 TV segments nationwide, including television appearances on Oprah, Dr. Phil, The Dr. Oz Show, The Steve Harvey Show, Good Morning America, The TODAY Show and many more.
All information on this blog is for educational purposes only. Lynnette Khalfani-Cox, The Money Coach, is not a certified financial planner, registered investment adviser, or attorney. If you need specialty financial, investment or legal advice, please consult the appropriate professional. Advertising Disclosure: This site may accept advertising, affiliate payments or other forms of compensation from companies mentioned in articles. This compensation may impact how and where products and companies appear on this site. AskTheMoneyCoach™ and Lynnette Khalfani-Cox, The Money Coach® are trademarks of TheMoneyCoach.net, LLC.