Financing a startup is a challenge. In fact, unless you have exceptional credit and some cash in the bank it can be almost impossible. Writing for SmallBusinessTrends.com, Tom Gazaway identifies five common mistakes that make it even a harder—yet are pretty easy to overcome with a little bit of planning and forethought. Gazaway suggests you consider the following:
“Did you form your entity and establish ownership percentages with financing in mind?”
It’s not uncommon for a lender to require anyone who owns 20 percent or more of the business to be included in any credit check required when applying for a small business loan. What’s more, they will likely all be asked to also sign a personal guarantee. Looking at everyone’s credit history is an often overlooked, but important, consideration when starting a company.
One or two owners with less-than-stellar credit might not be the harbinger of doom when looking for small business financing, but won’t make it any easier to get an approval. It is also a good idea to make sure at least one of the founders has a good enough credit score to make sure you have access to financing when you need it.
“Did you create a plan for your credit card usage?”
Many small business owners take advantage of low introductory rates and other credit card perks making credit cards a very popular way to finance short-term capital needs. There’s no collateral requirement and you have access to the credit when you need it and only pay interest on the amount of credit you use.
“On the other hand,” says Gazaway, “if you don’t plan for when and how you’ll use credit cards they could become a crutch for unplanned spending and maybe … poor and undisciplined spending that will hurt your company.”
Credit cards can be a valuable tool if used properly. Outlining a plan for how and when you will use credit cards, or any available credit for that matter, will make it easier to keep debt under control and available for when you really need it.
“Don’t treat your investors (your friends and family) like they aren’t important.”
Friends and family is one of the biggest sources of small business capital according to the Pepperdine Private Capital Index. Unfortunately, they’re also one of the easiest sources of capital to take for granted. Gazaway suggests, and I totally agree, “Just because they are a friend or family member doesn’t mean you shouldn’t structure the transaction professionally and that you shouldn’t report to them and communicate with them regularly.”
Before you take money from friends and family you need to determine if it’s a loan (for which you should make regular payments) or are they investing in your company (and are buying an agreed upon percentage of ownership equity). Depending upon the relationship you choose, you have either a creditor or a partner. Important decisions that are not only important for your business, but could impact how comfortable it is to sit around the Thanksgiving Day dinner table.
“Doing nothing about your credit is a mistake.”
As a small business owner your personal credit score will always be a factor when a lender considers offering you a business loan. Granted, some lenders weight your personal credit score higher than others in the decision-making process, but they all give it some weight. As a small business owner, that will likely never go away.
Because of that, managing your personal credit is critical and starts with knowing your current score and creating a plan to improve it if necessary.
Avoiding these common startup-financing mistakes will make it easier to access credit when you need it to fuel growth or fund working capital.