If you want to start a business, it’s imperative to safeguard it against failure. If you know the mistakes to avoid before you start your company, you’ll increase your odds for success.
Many business owners are so enthusiastic to get started that they fail to understand the risks involved when starting a business. Although a high percentage of new businesses fail within the first three to five years, you can be one of the fortunate ones and beat the odds.
Here are the five costly mistakes to avoid when starting a new business:
1. Forming a sole proprietorship. It may seem like the easiest and quickest route to take, but you’ll put yourself at risk if you don’t separate your personal finances from your business. Form a separate business entity like a corporation or LLC, even if you work from home. The biggest mistake that entrepreneurs make is leaving their personal assets vulnerable to business liens, lawsuits, and creditors. Keep your business separate from your personal accounts, and you’ll sleep better knowing that in the worst case scenario, all your personal assets are safe. Plus your risk of an IRS audit increases when you file a Schedule C!
2. Using personal credit to finance a business. Never use personal credit cards to finance your business ventures. Starting from day one, keep all personal and business finances separate. It will be easier for bookkeeping purposes, and you’ll keep your personal line of credit safe. The key is to keep your personal revolving debt low and to use a business credit card in the name of the LLC or corporation. Yes, the debt will be personal guaranteed. However, being under the EIN of the LLC or corporation, it will not show up on your personal credit report! This will help your personal credit score also.
3. Maxing out credit cards. Here’s the problem. If you spend like crazy using your personal credit cards, it will negatively affect your revolving debt ratio. This will have a negative impact on your ability to obtain a business line of credit. Even though business and personal lines of credit are separate, the bank will consider your personal credit rating when determining your eligibility for a loan. If you max out your cards, the bank assumes that you have a negative cash flow. The other problem is when you apply for a business credit card in the name of the LLC or corporation. 95% of the formula by the bank to determine if and how much to give credit to your brand new LLC or corporation is based upon your personal credit score and revolving debt ratio. If your revolving debt is above 40% or higher (5-20% is ideal) you may get rejected for any business credit card! Keep balances on credit cards low, and you’ll be more likely to get credit when you need it.
4. Applying for business credit when strapped for cash. The time to establish a business line of credit is before you’re out of money. Lenders want the assurance that you can pay credit card balances and loans. If you’re strapped for cash, you’re living beyond your means. If the company vehicle breaks down or you have an unexpected business expense, you may get behind on payments. Establish your line of credit when the cash flow is positive and you’ll have a soft place to fall when and if you need to use credit.
5. Failing to plan. Before the world becomes your customer, keep in mind that you need more than a wing and a prayer to succeed. The first step is to stop operating your business as a sole proprietorship and incorporate or form an LLC immediately! Next, obtain a business credit card in the name of the LLC or corporation and stop using your personal credit cards for your business. In about six month, your LLC or corporation may be in a position to obtain a business line of credit, a business loan or perhaps a merchant account cash advance (the last one is the hottest form of lending to businesses today, but the least understood). Plan ahead, build that foundation and your business will keep standing when the unexpected expenses arise.
Start with a plan, do your research, and you can avoid the five costly mistakes that sink most new businesses. It’s a new year!
Make this year a prosperous and profitable one!
For more information on starting your business and (avoiding common mistakes), read on! Fast Business Incorporation.
About The Author: Scott Letourneau is the CEO of Fast Business Credit, Inc. When it comes to securing cash and vendor lines of credit and avoiding costly mistakes his company is the authority. For further assistance regarding the development of business credit go to http://www.FastBusinessCredit.com or call FBC at 1-888-313-6333 or 702-977-5246.