Be Smart: 4 Mistakes to Avoid When Financing Your Startup
As a new business owner, one of the hardest things to do is raise financing for your business. No doubt, there are several ways to finance your startup, like getting a business loan, starting a fundraiser, etc. But, one of the most crucial things to do when you think of raising money for a startup is to find investors.
There are various types of investors available out there. You can even find one in your family and friends, but venture capitalists and corporate investors are the most common ones. They may work differently, but mostly they put out money for you to finance your business in exchange for equity (for investors) or your future cash flow (for business loans).
While all these options are useful, they can be very dangerous for your business if you don’t handle them properly. That said, here are some mistakes you should avoid at all costs while looking for options to finance your startup.
As a business owner, finding financing is critical, but one of the pitfalls you can fall into is overleveraging. What does overleverage mean? It’s when a company has difficulty paying loans, and at the same time, has a hard time keeping up with the operating costs due to debt. This situation can result in a downward spiral where the company keeps piling more debt to stay afloat, worsening the situation.
It doesn’t mean debt is all that bad. It’s helpful when appropriately handled. Many companies take debt from traditional banks or alternative online lenders- like CreditNinja offers Cash Advance. They can grow their businesses by acquiring new equipment, expanding to other locations, etc., with the help of this financing.
As long as a company can manage its debt correctly, it can make it grow.
However, with poor debt handling, a business can be on a dangerous path. Taking on too much debt will strain the company’s finances because instead of putting the majority of the cash flow into expansion and operating costs, it will be used to pay the debt. On the other hand, a less leveraged company is better positioned because it can sustain revenue despite paying off debt.
Having Negative Cash Flow Investments
In some cases, having negative cash flow investments can be a red flag for investors. It’s because it often means the management is inefficient in managing its revenue. It may also be a good thing because it tells your investors that you’re positioning the company for growth; however, it’s not always the case, especially for startups.
Giving Up Too Much Equity
By taking on partners or investors, you will have an additional source of cash flow, but you will be giving up a part of your company’s ownership in return. It’s not a bad thing when you’re in complete agreement with your partners and investors. However, if they have a radically different viewpoint, it can create problems.
For example, venture capitalists will often have a more aggressive approach to management because they want to justify their investments. So if you prefer to have a more measured approach, it will create conflict. Not only that, by having many people taking hold of equity in your company, you will be paralyzed in terms of managerial decisions, especially if your company is not the game-changer type.
Also, they can vote you out of the company if they have a more significant percentage of equity than you. So again, equity financing is all well and good but don’t do it too much.
Not Having Credit Control
Your cash flow is the lifeblood of your business. While sales are also essential, you need to control your credit and accounts receivable. Through credit control, you’ll be able to reduce your company’s bad debt, increase your business cash flow, and even improve your credit terms with your suppliers. It’s especially true for new businesses experiencing a boost in sales.
Without credit control, your business will have issues with debt repayment, billing your customers, and other cash flow issues. Not to mention that it will give your customers a poor impression because of how long their transactions will take. Also, it can scare away investors if you’re looking for financing from them.
Financing your business is one of the hardest parts of maintaining a startup. Without financing, the startup will not stay afloat for long or won’t even have the chance to get off the ground. By being smart about it, you can increase your cash flow significantly and even expand more in the future.