Last Update: March 3, 2015
ore than 70% of the nation’s startups use personal savings or assets as a primary source of funding when starting a business (WSJ Consumer Finances Study). Yet many are unaware of the potential pitfalls and mistakes they should avoid when using personal finances to launch a startup.
How can you avoid making huge financial mistakes when it comes to bootstrapping your small businesses? Here are ten tips to help you succeed when you’re ready to finance your next big idea.
1. Don’t expect profits overnight.
The mistake it seems every young entrepreneur makes is expecting successful and profitable results to be attained more quickly than they can realistically be attained. It’s everyone’s dream to start a successful business, but often, it’s under capitalized and must be bootstrapped–which, in all honesty, takes more time than any entrepreneur wants it to take.
2. Do show your profits.
The biggest mistake I see on a regular basis from businesses that are bootstrapping is that they attempt to lower their costs, including minimizing their taxes, which is a perfectly fine thing to do. But what happens as they grow is that their financials show losses or breaking even year after year. That makes their growing business less “bankable” when they need access to conventional sources of funding, likes lines of credit or term loans. Showing profits are a good thing when approaching a bank. It demonstrates that the business is viable and decreases the perceived risk.
3. Don’t grow too fast.
I’ve found that small business owners and entrepreneurs try to grow too fast, too quickly. From personal experience, I’ve definitely had to weigh the benefits against the cons when it comes to pursuing significant growth of the company. While we have grown to a fairly large size today, there is still plenty of room to grow. However, we have decided to maintain the status quo and simply pursue slow and steady growth so that we maintain the quality of our content, site, and team atmosphere with our staff.
4. Create an emergency fund.
An emergency fund is just as essential in business as it is in personal finance. Maintaining a sufficient cash flow prevents a new entrepreneur from relying too heavily on lenders and lines of credit. The last thing you want to do as a start-up is create debt that could’ve have been avoided with a little more planning.
5. Don’t run out of cash.
Running out of cash is the #1 cause of death among startups. You need to carefully manage A/R and A/P so they match up well, as well as minimize expenses big time, control inventory build-up, and aggressively go after early revenue (paying customers beget more paying customers).