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Striking out on your own in business is one of the most exciting decisions you can make. Taking your skills to the open market and being your own boss is thrilling, and the potential for growth and independence can open up a world of possibilities.

Still, lots of small businesses don’t make it, and it is important to remember that your first year of business is full of potential pitfalls and missteps. Here are seven tips to help you avoid common business mistakes:

1. Understand the realities

Common wisdom holds that the average small business won’t even begin to show a profit until it is at least two years old, and more likely not until it starts to approach year five. Having a clear idea of what your startup costs will be is critical. Knowing isn’t really an option, but having the best estimate available could save your business. Try using a free Startup Calculator to get some ideas about what you’ll need and what it will cost.

2. Write a Business Plan

Some people make the mistake of thinking that if they’re not borrowing money they don’t need a traditional business plan. Writing this document is an important step in the planning process. Researching the market, competition, and target demographics as they relate to your business will help you to understand what you’re getting yourself into, and to make smart decisions about location, pricing, and investment. Having a thorough, well-researched business plan will be to your benefit, whether or not you need to apply for a loan.

3. Don’t Borrow Too Much

Ideally, you’ll have a nice pile of savings stashed away that will help to get your business off the ground. More than likely you will have to borrow some money. The downsides to borrowing too much money are pretty obvious: if your business doesn’t do as well as you expect you may not be able to pay it back.

The right amount for a small business loan will depend on your business, but you want to ensure that you will be able to get the best return on your investment. Consider what your monthly interest and payment will be as well as the length of the loan. Subtract the payments from any expected profits to understand what the loan would cost you.

4. Don’t Borrow Too Little

Starting without enough capital is just as dangerous. Some failed businesses think only of the cost of starting up and assume that their profits will cover their operating costs. Without the capital to stay open, you might not have the chance to bring in those customers who will help move you into the black later on.

It would be very convenient if there were a simple formula that would tell you how much to borrow, for example, taking the results of the startup calculator and adding on a percentage. Unfortunately, there is no simple answer. Thoroughly research the cost of doing business in your area, create a company budget, and stick to it, and you should have some idea how much you need.

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