Setting up a business can be expensive. Just what is the best way to fund these startup costs? There are three main options: savings, borrowing money, or getting help from an investor. All three are equally great ways to fund a startup, but there are a few mistakes that you want to avoid when exploring these different types of funding. Below are some of the biggest mistakes to avoid.
Borrowing too little/too much
Many people borrow too much or too little when starting a business.
Borrow too little, and you could find that you cannot afford all the equipment and services you need to launch your business. You’ll then need to take out another loan, which could be harder to approve.
Borrow too much and burden yourself with unnecessary debt, including added interest fees. It’s better to borrow only what you need to save money on interest.
To ensure that you only borrow the amount you need, spend time carefully budgeting out all the costs of launching your startup beforehand. Having a clear business plan with carefully calculated costs may even help when getting approved by specific lenders.
Taking out a high-interest loan
Some people are so eager to start a business that they don’t take the time to compare loan options. This often results in taking out a loan with a much higher interest rate than is necessary.
Allow time to shop around for loans to save yourself money on interest fees. Look beyond banks and traditional private lenders and consider options like peer-to-peer loans and credit union services. These alternative lenders often offer much lower interest rates, although they may not be suitable for huge loans.
Giving too much equity to investors
Asking investors to give you money can have benefits. Unlike taking out a loan, you do not have to pay back the money. You do, however, have to provide shares in future profits in most cases. This is where some people can make the mistake of offering too high a percentage of their earnings.
How much equity should you give to investors? Experts recommend 10 to 20% in most cases. Generally, the more money you ask for, the greater the equity an investor will ask for. If you’re seeking funding from multiple investors, consider how much of a share each investor is getting.
Using all your savings
If you have some savings, it could be a good idea to put these towards starting your business. You won’t have to pay interest on these savings, nor will you have to give away a slice of your profits. In other words, you don’t owe anyone anything when using savings.
That said, you should be careful about spending all your money on your business. It’s good to keep some personal savings aside for emergencies – whether business-related or personal. Getting rid of this cushion could be something you one day regret.