You’ve got an amazing business idea, the skills to run your own company, and the passion and drive to make it a success, now all you need is the money. Raising the money that they need to get their company going is the first big hurdle that all new business owners face and it’s going to be hard.
There are more options than ever for raising money because you can use things like crowdfunding or peer to peer lending rather than traditional investors or business loans, but that doesn’t necessarily mean that you’ll be able to get the money you need without any trouble. In fact, a lot of people make mistakes when they’re trying to fund their business and this can cause them a lot of trouble further down the line.
If you’re just starting your business journey and you’re trying to find the money to get things going, make sure to avoid these common mistakes.
Having A Bad Credit Rating
Your credit rating gives loan providers and other investors a sense of how well you manage your money and how reliable you are, so it’s very important when you’re trying to fund a business. A lot of people have trouble finding the funding that they need because they have a bad credit rating.
If you go to a business loan company and your credit rating is bad, they’ll either turn you away completely or they’ll offer you a loan with a very high interest rate. If you take that loan, your repayments are going to be massive and that’s really going to cause you problems when you’re trying to deal with your monthly overheads once the business is up and running. Cash flow issues are the number one reason that new businesses get into trouble and that’s far more likely to happen if you’re trying to manage massive loan repayments. Make sure you take a look at your credit rating and try to improve it before taking out a loan.
It’s equally as bad if you’re approaching investors because they’ll want to know a little bit about your financial history. If they see that you have a very bad credit rating, they’ll run a mile. That’s why it’s so important that you pay down any existing debts that you have and fix your credit rating before you start looking for funding.
Not Investing Your Own Money
If you’re going to convince people to lend you money to start a business, you need to show that you’re confident that it’s going to be a success. It’s also important that you’re only borrowing what you need (we’ll come to that later) which is why you need to be investing as much of your own money as possible. If you don’t have much to put in, it might be best to hold off for a while and save some money first. Why should investors take the risk by putting their money into this business if you’re not willing to do the same? In most cases, it’s a good idea to use your own money to get things running and start making a few sales if you can, so you can show investors that the idea has legs before you start asking them to put their money in as well.
Borrowing More Than You Need
This is a mistake that so many people make and it will come back to bite you later. Say you approach a business loans company with a figure in mind, they look over your paperwork and then inform you that you can actually borrow more than that. Sounds great, right? You’ll have more money to play with and that’s only going to benefit the business. Unfortunately, it’s not that simple. If you’re taking out a bigger loan, you’ll be more inclined to spend money and you’re going to have to pay all of that back. That means you’ll have far higher loan repayments and you’ll be paying it back for longer which is going to make it a lot more difficult to manage your cash flow effectively. When you’re looking at loans, the first thing you need to do is draw up an extensive financial projection so you can get a rough idea of how much it’s going to cost you to start the business up. Then you need to use a business loan calculator to work out exactly what the monthly repayments are going to be and how long you’re going to be paying it off for. If you can comfortably afford to borrow more, that’s fine. But if not, you should stick to the original amount.
Choosing The Wrong Investor
When you’re picking investors, there are a few things that you need to consider. The first thing to remember is that they’re not just there to give you money, they’re also there to give you advice. That’s why you need to choose an investor that has good experience in your field. If they’ve never invested in a business in your industry before, they probably won’t be able to give you good advice on running the business and you should look elsewhere. Before meeting with investors, you should do a good amount of research into the other companies that they work with and find somebody that has relevant experience.
However, it’s important that their experience isn’t too close to home. If you take money from an investor that also invests in a rival company, that could cause you a lot of problems. They aren’t going to be impartial with their advice because if you succeed, another one of their investments is going to suffer. That conflict of interest can lead to some very difficult situations with your investors so it’s best to avoid dealing with anybody that has interests tied up in rival companies.
You should also think about how many other investments they have. You’re a new business and you’ll need a lot of guidance. That’s why it’s best to choose an investor that doesn’t have that many other business investments so they’ve got more time to dedicate to you.
If you can avoid these common mistakes, you’ll be able to find the right funding for your new business and you won’t have any problems in the future.