When it comes to launching a startup, entrepreneurs know that the most precious thing in the business universe isn’t customers, products, brand equity, or even patents: it’s capital.
Indeed, with enough cash, entrepreneurs can steer their startup around obstacles, and exploit opportunities. But without enough cash, it’s only a matter of time before a competitor takes the reins and races away. Frankly, Darwin didn’t have to go to the Galapagos Islands to glean that natural law is “survival of the fittest.” He could have just taken a stroll down Wall Street or Main Street (although there are no flightless cormorant or waved albatross to encounter, which may not be such a bad thing).
However, some entrepreneurs that get access to glorious business funding nevertheless make some regrettable—and frankly, avoidable—mistakes that ends up costing them thousands of dollars, and more problematically, puts their startup at risk of going sideways, falling behind, or disappearing from the radar screen entirely. Here are the three of the costliest errors:
Borrowing more than is required
Entrepreneurs who borrow too much cash end up with “dead money” sitting in an account, being eroded by inflation. Or worse, they feel obligated to spend the money in order to meet the expectations of their lender, which is never a good idea (spending for the sake of spending isn’t part of the best practice playbook). To be fair, entrepreneurs who make this mistake typically aren’t guilty of greed, but rather of not doing their homework to decide how much they really need.
Not understanding the total cost of borrowing
There are a wide range of small business loans available, including many interesting products in the alternative lending marketplace such as merchant cash advances, invoice factoring, and so on. Obviously, each product has a total cost of borrowing, and entrepreneurs need to clearly and fully understand what these are. Looking exclusively at the APR isn’t going to tell the full cost story.
Thinking that banks are the only business funding option
Some entrepreneurs believe that the only option is to apply for a conventional bank loan—which simply isn’t the case. As noted above, there are many funding products offered in the alternative lending marketplace. What’s more, most of these lenders are fine with borrowers who have impaired or bad credit, or that have a limited business history (which is the case with most startups).
The bottom line
Having accurate information at the right time is the difference between being a successful entrepreneur, and trying to figure out why a can’t-miss opportunity failed to get off the ground. Use the above facts to make an informed business funding decision, and put your startup on track for sustained success and long-term growth!