Lots of people have great ideas that could become great businesses, but a good many of those ideas remain only ideas because of lack of funding. If you’re committed to getting your business off the ground, though, there are several ways you could go about it: you could invest your own money, raise capital from others,or continually reinvest your company’s earnings back into the business until it takes off.
The third style, called “bootstrapping,” is a popularchoice, but it’s only suitable for businesses that generate money right from the start. If bootstrapping is not an option and you don’t have a pile of money of your own to invest, you will need to raise capital from investors. All three types of funding have their advantages and disadvantages, but in this article, we’re going to cover the “must avoid” funding mistakes.
1. Ask for the Full Amount You Need Right from the Start
Most entrepreneurs believe that if they ask for a lesser amount of money, they will have a better chance of receiving something. However, if you underestimate how much money you need, you won’t be fooling anyone, least of all your investors.
Accurately calculate how much money your business requires, and don’t be afraid to ask for a little extra. Most likely, that funding will eventually run out, and you will need that little bit of cushion to cover other important aspects of your business, such as advertising. Asking for more money once the initial investment has been secured is never considered a good sign by investors.
2. Don’t Give Away Too Much Equity in the Beginning
Investors want to take as many shares as they can for the amount of money they invest, but if you give them too much equity, you won’t be doing yourself any favors.
Chances are you’re planning to make your company profitable after the first round of financing. However, reality can paint a different picture, as new businesses often face a variety of problems.
Try to get as much money as you can in exchange for as little equity as possible. If in the future your back is against the wall and you end up needing another round of financing, you could lose ownership of your own firm if you don’t ask for enough in the beginning.
3. Don’t Use Personal Credit Cards
Some company owners use their personal credit cards to fund their business, but this is a big mistake. The annual percentage rates on your personal credit cards are based on your personal credit score, and in most cases that interest is too high. Studies have found that businesses that are funded by personal credit cards often fail and fail quickly.
Moreover, if your business crumbles, you will still have to pay back the debt, and if you run into difficulties with that,your personal credit score could suffer. Even if you truly believe your idea is worth the risk, we never recommend funding any business with personal credit cards.
4. Watch out for Advance-Fee Loan Scams
There are millions of entrepreneurs who want to start their own companies and go big. That’s why there are so many criminals who guarantee to fund those businesses, no matter how bad someone’s personal credit score is.
These shysters often ask for an advance fee that they tell you will cover their expenses, but they disappear soon after. Be careful and contact the Better Business Bureau if you come across this scam.
5. Keep Good Financial Records
Before you’ll be able to gain any funding, you’ll have to have detailed records of your company’s cash flow. No investor will write you a check if you don’t keep an account of every penny earned and spent.
Keep an eye on your money so that you have the cash you need to cover your day-to-day expenses. Give your business the chance to grow and thrive by keeping good records. When you know where you stand with regard to your company’s finances, you’ll make better business decisions day in and day out.
If you’re not good with numbers, hire an accounting firm to keep track of things for you, so that you can show investors that you’ve got everything under control.