Entrepreneurs often spend years turning a great idea into a functioning business, and one of the most significant causes behind this slow process is the difficulty most face when securing ongoing business financing.
Once you’ve garnered enough seed capital to fund your business, though, you should be in the clear. Right?
Not so fast. Just because your company is funded doesn’t mean things get easier. In fact, many budding entrepreneurs end up failing due to funding and post-funding issues.
Although a great idea and hard work can go a long way, the following financial mistakes can bring down a company even after getting your initial business loans or round of funding.
Here are five common mistakes to avoid, after you’ve secured your initial funds.
1. Adding Too Many Employees, Too Soon
Quick growth in a startup or small business might sound great, but as with most things in life, too much of a good thing can be detrimental.
If your company starts out strong after initial funding, it can be tempting to hire more employees, and maybe even expand your leadership team, in anticipation of continued growth.
Unfortunately, overhiring is a huge financial mistake. In addition to the costs of hiring and training new workers, you’ll have to buy more equipment, supplies, furniture, and even office space. If your success doesn’t continue at its current rate, you may end up with more office and human capital than you really need.
Not only will this drain your funds, but customer and investor perception can turn negative if you have to downsize, and the emotional impact on your remaining employees won’t be good, either.
2. Not Planning Future Financing
It’s rare that any business needs only one injection of funds. For most business owners, an ongoing source of capital and continued plan for financing are must-haves.
Don’t make the mistake of thinking your great idea and work ethic will ensure your initial investment is enough. Getting a business loan or initial funding is great, but even the most ingenious CEOs will need a line of credit or other plan for financing large expenses.
The best time to think about future financing is before you really need it. Consider which financing options might make the most sense for your type of business and your likely expenses. You may want to apply for a line of credit, for example, even if you don’t need to start using it right away. If you’re approved, you’ll know you have the flexibility to use it in the future, should opportunities (or emergencies) arise.
3. Not Thoroughly Evaluating Lenders
Another reason to start thinking about financing early is so you’ll have plenty of time to do your research.
Before choosing any type of financing to apply for or accept, you should thoroughly evaluate your options. This includes checking their reputation, public perception, transparency, and customer service, along with the actual financing details.
This is incredibly important, since any financing agreements you sign will have a huge impact on your costs of capital and doing business, for weeks or even years to come. Since there’s such a range of financial products and services out there (from term loans, to lines of credit, to merchant cash advances, to invoice financing…the list goes on and on) and all of them offer slightly different terms, interest rates, and requirements, you’ll need time to think.
There’s a ton of information online to get you started. (For instance, here’s a quick guide to evaluating fintech financiers.) If it all feels overwhelming, you may want to consult a trusted financial advisor to help you make the best choice.
4. Waiting Too Long to Make Hard Decisions
This emotional pitfall can strike any entrepreneur, no matter how well-funded you may be. Sometimes, having access to funds is only part of the problem, and deciding how to use them is much harder.
Economic downturns, the loss of a major client, or failure to win a big pitch can all plunge your growing firm into financial turmoil. Rapidly changing technology and business needs can test your ability to keep up. Taking time to evaluate the situation is vital, but it’s important that you not hesitate when making tough, timely decisions.
Maybe you need to hire, or lay off employees, change vendors or find cheaper ones, or invest in new or different equipment. You might fear making these hard decisions, but it’s generally a mistake to allow this fear to cause hesitation. Waiting to make a decision about how to deploy your funds could prove to be a devastating decision in itself.
5. Lacking a Financial Mentor
Some entrepreneurs don’t believe they need outside help. Some recognize how helpful an adviser could be, but don’t know how to find a small business mentor, or even how to start looking.
Running a business without a trusted mentor or group of peers can lead to many preventable financial mistakes.
Fortunately, organizations like SCORE, the Women’s Business Development Center, and the SBA’s Small Business Development Centers can help connect you with the tools, training, and resources you need, so you can benefit from the experience and knowledge of thousands of business leaders who have been where you are.
Financial Mistakes Can Happen to Any Business Owner—But There Are Ways to Avoid Them
Even companies with huge potential and cash in the bank can fail due to preventable financial or operational mistakes. With some focus and plenty of advance planning, you can avoid many of these mistakes.
By calling on your peers, making use of the many small business resources available, and seeking the support and advice of other entrepreneurs, you can build a valuable network of mentors to help you plan ahead and overcome any challenges that may come your way. This will serve you immensely, through your first funding round or business loan, and beyond.