StartupJournal offers some good tips to first time entrepreneurs on managing the financing process both before and after the money has been secured for the start-up. Here are their tips and my thoughts on each:
- Not raising enough capital. It is very difficult to go back to your banker or investor for more money soon after you get started. That is a red flag that something is going wrong or that you do not know what you are doing. This is often the result of being too optimistic. I always have entrepreneurs start with their "most likely scenario" with their forecasts. Then I tell them that this scenario has just become their "best case". They then need to come up with two more progressively pessimistic scenarios, which will become the basis of the numbers that present for financing. As my father used to say, "Double the costs and triple the time and you are probably closer to the truth."
- Risking everything you own. Save yourself a reserve to make it through a longer than expected start-up time period or for future hard times in your business when you can't pay yourself for a few weeks.
- Borrowing from friends and family. I just gave a lecture on this yesterday. I am not a big fan of friends and family as business backers, because I like my friends and want to have family gatherings be a peaceful as possible. If you do go this route, know what you are getting into! Your social calendar may get pretty lonely and Thanksgiving may get rather tense if business goes bad. Make sure they know what they are getting into! Set clear expectations making sure they actually read your business plan and understand all of the risks. Disclosure is critical to setting proper expectations. Keep business as business, friendships as friendships, and family as family if at all possible.
- Failing to keep good records. You will be expected to provide updated financial reports on a regular basis from the beginning. Too many entrepreneurs shove it all in a shoebox and wait until the first time taxes are due to sort it out. That is too late for those who trusted you with their money.
