One of the biggest issues many entrepreneurs face is a lack of capital funding. They may have great ideas and may be champing at the bit to build up their business, but without sufficient operating cash, any business will struggle to remain afloat.
There’s also the difficulty that many already-successful entrepreneurs face of tying up all of their personal net wealth into the business to ensure its success. When this happens, their own personal finances tend to suffer as a result.
This is when it’s likely that personal credit card debts will spiral out of control and other outstanding personal debts may end up getting deferred in an attempt to ensure the business keeps operating during the difficult start-up phase.
So rather than trying to struggle through challenging times like these, there are some simple things entrepreneurs can do to make the entire start-up phase a little easier financially.
1. Build a Buffer
Before you take the leap into the exciting world of full time entrepreneurship, take some time to build up a savings buffer. This is money you put aside now while you still have a regular income coming in that is designed to help you for the leaner times ahead.
Besides, when you have savings set aside you can draw on these to cover your living expenses for a while. This is far preferable instead of drawing a salary from a floundering company that needs all the cash it can get until it’s off the ground.
2. Reduce Personal Debts
While you’re building up your savings buffer, it can also be a good idea to work on cutting down any personal debts that can eat into your cash flow at the same time.
Pay down your outstanding credit card balances and pay off any personal loans. This will ease your cash flow and keep your living expenses to a bare minimum, which makes life easier on your business. It may not be possible to pay off a mortgage before you start up your new business, but work on ways to minimise your payments.
This might mean shopping around to find a more competitive interest rate or considering fixing in your interest rate to ensure that your payments won’t increase over the next few years.
3. Trim the Budget
No matter how careful you might think you are on your current household spending, there is always room to trim a little excess off the top wherever you can. Negotiate for lower costs on phone or internet charges. Get rid of the cable TV – there’s nothing on anyway. See if you can get your bank to negotiate for lower interest rates on any debts you have outstanding. Each of these things will make it easier to survive while your business is in the initial growth phase.
This tip is crucial for any entrepreneur currently living off savings, as the lower you can get your living expenses, the longer those savings are going to last.
4. Recruit Friends and Family
Borrowing money from friends and family is never a good idea. However, there’s nothing wrong with recruiting a little help from loved ones. When you’re considering asking for help from family, don’t go with handshake deals. Instead, document all the details of the loan properly, including what and when you expect to pay it back.
Make it very clear whether you intend to repay the amounts with interest, or whether you’ll be issuing shares in the company as repayment.
One of the benefits of documenting any private loans this way is that you’ll find it easier to show any future investors into your company how your financial structure looks.
5. Don’t Dilute Ownership Too Quickly
Many entrepreneurs are keen to offer friends, family and even employees a share in the company they’re building up. This often leads them to diluting their own share in the company.
If the object of releasing shares in the company is to raise investment capital, try to limit the total share allocations to no more than 30% or 40% of the total ownership amount. Leave the rest for yourself.
Besides, if all your shares in your own company are owned by other people and you’re doing all the work of getting it up and profitable, what’s left in it for you?
This was written by Fred Schebesta from Finder.com.au.