Mistakes to Avoid When Seeking Startup Financing

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djbaxter

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5 Mistakes to Avoid When Seeking Startup Capital
by Jonathan Long, Entrepreneur.com
May 12, 2017

I’m a huge fan of bootstrapping, and it can be a viable option if you are extremely cautious when it comes to expenses, if you have a little seed money and if your business concept will generate cash flow early.

If bootstrapping isn’t a good fit, then you need startup capital, which can be secured from several sources. While every funding option has pros and cons, there are certain mistakes you need to make sure you avoid when seeking startup capital, like the five outlined below.

1. Underestimating how much money you need
2. Giving up too much equity in the beginning
3. Getting buried in personal credit card debt
4. Falling for advance fee loans promising funding regardless of credit history
5. Not having a detailed cash-flow analysis

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I think the 800 pound gorilla in the room is selling equity. Start-ups think they should sell equity as their only source of capital. But it's the most expensive. If a start-up has revenues, and a clear path to revenue, they should highly consider cash flow funding to bootstrap their way to higher revenue levels and valuations. Very similar to the deal Kevin O'Leary offers contestants on The Shark Tank - lump sum capital up front in exchange for a fixed royalty, for a fixed period of time. It's WAY cheaper than equity and if a start-up has the revenue growth and margins to support it, it's a no brainer.
 
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Thank you for sharing this!

While these things may seem like mistakes, sometimes they aren't mistakes at all and can work to your benefit.

For example:

1. Underestimating how much money you need-
In this case, A lot of times, if you underestimate how much you need, especially starting out that can work to your benefit. If you were to go to a traditional bank and say that you want to apply for 100k..But you only qualify for 50k..The bank is not going to come back to you and tell you that you only qualify for 50k..They are most likely going to just turn you down. A lot of times when you get funding, you can always get more as you go. It's better IMO to go for less coming out of the gate, that way you have a better chance of approval, and you can either build your credit, or reputation with lenders and get more at a later time.

2. Giving up too much equity in the beginning-
There are so many different funding options, and if working with a broker, then more times than not, they will want to do what's best for the client.

3. Getting buried in personal credit card debt-
You want to make sure your personal credit is good, especially starting out. As you go along, Build your business credit right along side of it. Sign up to get your dunn & bradstreet as your building your credit profile.

4. Falling for advance fee loans promising funding regardless of credit history-
One should NEVER Pay a broker an upfront fee!

5. Not having a detailed cash-flow analysis-
Simple bank statements showing the deposits you make can help, or simply getting an accountant.

Having all of these things in place, and watching out for the lenders/brokers with the upfront fees is an essential part of growing your business.

Thanks again for sharing this! :)
 
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