Give your business idea its best chance to grow without risking your personal finances. While every funding option has pros and cons, there are certain mistakes you need to make sure you avoid when seeking startup capital, like the five outlined below.
- Underestimating how much money you need: A lot of entrepreneurs think they will stand a much better chance of securing funding if they ask for a smaller amount but most investors will see that you will eventually run out of money if you requested less than you needed and get yourself into trouble.
- Giving up too much equity in the beginning: If you have to raise more money down the road, your ownership stake can shrink to virtually nothing. No entrepreneur starts this grueling journey with the goal of being a minority owner in his or her own company.
- Getting buried in personal credit card debt: Racking up personal credit card debt puts you in a very bad position, especially if the business fails. If you have to close the business, you are still left with a mountain of debt on your shoulders that has to be paid back. If you fall behind on payments, your credit score will be destroyed, negatively impacting your personal finances.
- Falling for advance fee loans promising funding regardless of credit history: With so many individuals seeking funding to start a business, it should be no surprise that there are criminals trying to take advantage of these entrepreneurial desires. Advance fee loan scams guarantee funding no matter how bad your personal credit history is. They ask for an upfront fee — often saying it’s for processing — and once you pay the fee, the loan never happens. It’s easy to say, “I’d never fall for that,” but the fact that the Federal Trade Commission (FTC) has a page dedicated to warning consumers about this scam proves it’s a major problem.
- Not having a detailed cash-flow analysis: Anyone who is about to write a check, whether it’s a VC firm or traditional lending institution, is going to want to see that you have a full grip on the cash-flow and more importantly, how you plan on spending their money.