Don’t Make These Common Startup Financing Mistakes

In my career, I’ve worked with startup founders and small business owners across the country for more than ten years. There are a lot of things these business leaders have in common, from an entrepreneurial mindset to a drive to succeed. Another thing many startup founders have in common is the challenge of finding and keeping the correct funding sources to launch and grow their businesses. Unlocking these crucial funding sources and creating and sticking to a financial plan can be tricky at the best of times. In the wake of COVID-19 related economic slowdowns last year, it became even more difficult. If you’re looking to start, grow, or re-start a small business this year, take a look at these common funding mistakes that startup founders make and ways you can avoid them this year.

Hiring A Full-Time Team Too Quickly

One of the biggest mistakes you can make regarding your finances is hiring too many employees too rapidly, especially if all – or even the majority – of those employees are full-time. Committing to those full-time salaries for new employees is a great way to burn valuable start-up cash fast and can lead your accounts into the red faster than expected.

Instead of seeking a full-time team right out of the gate, look at freelance, part-time, and project-based contracts to begin. This will allow you to grow your team along with your business, without dumping crucial initial capital into full-time salaries to start.

Purchasing Too Much Inventory

Startups often stock up on products and services right out of the gate for a number of reasons, including price breaks on higher quantities purchased, or over-projecting the demand. But, whether your venture is just getting started or looking to grow into its next stage, purchasing too much inventory too quickly can waste more money than it saves.

Don’t be afraid to negotiate the price and minimum order quantity of goods you purchase from suppliers and partners as a new business. If your business is still in the early phases of growth, placing a smaller bet on new inventory, even at higher prices, can save money and reduce waste. Tying up too much capital in these early stages can prove detrimental to your venture’s growth. As we’ve all seen over the past year, things change and products evolve. There is no need to commit to an abundance of inventory early in your company’s development.

Not Enlisting Help from Financial Professionals

The biggest reason why many founders seek advice from financial professionals early on is — experience. A winning pitch based on projections might win over one or two private investors, but it does little to drive real, sustainable growth for your business. Instead, investing in professional financial experience can be incredibly valuable. For those who need help without upfront cost, some startup consultants will help you plan for the future with a success fee based on securing the capital you need to launch and grow.

Taking the First Offer – On Anything

If you’re looking to buy a new car, you don’t purchase the first one you test drive and you never take the first offer. Funding your startup is no different. We often see, however, that startup founders may negotiate on price, but not other important terms with funders, prohibiting a business from seeking additional capital down the road.

In addition, accepting an offer with lower funding limits or an agreement that you can’t escape after your needs exceed what the lender can do, can also set you up for failure. These choices are usually made based on price and how the lender fits into your financial model, but bringing on the wrong lender, even if they pose the lowest cost option, can create a major roadblock for future growth.

For example, Merchant Cash Advances are great if you need a super-fast turnaround to cover operational needs. Taking out a long-term high-interest loan will not serve your company well if you use it to fill an order or bridge payment from a customer.

Separating the Types of Funding Needed

Many startup founders don’t spend the time they need to in order to find the correct type of financing for their business. For example, you wouldn’t want to take out an expensive merchant cash advance just to purchase a piece of equipment your business needs to help it grow.

It’s important to compartmentalize what funds are needed for your venture, as well as where and how you allocate those funds. How you source funding for capital improvements and investments is different from finding capital for aspects of your business, like inventory, fulfilling purchase orders, or general working capital. Your short-term capital needs and capital needed for longer-term investments are verydifferent. If you can separate the type of capital you need it will be easier to build your resources accordingly.

Avi Levine, Vice President at Star Funding, brings a strong background in manufacturing and consumer products to his real-world approach to Purchase Order Financing. With a unique view of business financing, Levine is helping startups, entrepreneurs, and small business owners find innovative ways to grow. With hands-on experience in wholesale distribution, Avi understands how businesses operate from the inside, out.