As the owner of a new business, it’s natural to have a variety of fears. Though all of them require your attention, those associated with funding should move to the top of your priority list.
Money, or rather, lack thereof, is one of the primary reasons that startups dissolve before they get up and running. According to data from the U.S. Bureau of Labor Statistics, approximately 20% of small businesses in the United States fail within one year of opening. And by the five-year mark, roughly 50% are no longer operating.
With this in mind, it’s critical to understand the common financial challenges you’ll face as a business owner and the steps you can take to avoid them. Here are five that deserve your attention:
Turning to the Wrong Place for Funding
Some startups require more funding than others, but all of them need some capital to get off the ground. If you’re not cautious about your approach, you could accept money from the wrong funding source, which will cost you in the long run. There are a variety of places to turn for funding, with many entrepreneurs focusing their immediate attention on venture capitalists and angel investors.
Other options include but are not limited to:
- Business grants and loans, especially if you’re part of a minority group.
- Personal loans.
- Home equity loans or lines of credit.
- Loans from friends and/or family.
- Credit cards.
You’re likely to face funding challenges during the early stages of your startup. Knowing your options is the best way to clear the air. And don’t be afraid of mixing it up. There’s nothing wrong with mixing funding sources, such as using both credit cards and a personal loan to secure the money you need.
You may think you’ve planned for everything, but soon enough hidden costs will start to add up. It may not be possible to plan for every expense that will arise in the future, but understanding that there will be hidden costs allows you to prepare accordingly.
Here’s a list of some of these costs:
- Hiring, onboarding, and training new employees.
- Unnecessary spending, such as on supplies and equipment that aren’t essential to your business.
- Travel and entertainment (such as taking clients out on the town).
- Consulting with a professional, such as a business attorney, certified public accountant (CPA), or financial planner.
Hidden costs are hidden for a reason; you don’t know when they’ll pop up to bite you. However, if you pinpoint at least half of these during the early days of your startup, it’s easier to avoid them in the future as well as recognize others.
The last thing you want to do is fall behind on your taxes. This has the potential to sink your startup before it ever has the chance to succeed. Not to mention the fact that it can result in serious trouble with the IRS (or another tax agency).
Taxes come in many different forms, including but not limited to:
- Payroll taxes.
- Federal taxes.
- State taxes.
- Self-employment tax.
- Excise tax.
If you neglect to pay your taxes in full and on time, it won’t be long before someone notices. For example, if you don’t pay your payroll taxes on time, it could result in a penalty of no less than 2% on the amount you owe.
Rather than take this risk, it’s best to consult with an experienced tax professional from day one. Yes, this is another expense you have to account for, but it’ll give you peace of mind regarding your taxes as well as protect you from further losses.
Advertising and Marketing Budget
In a perfect world, your company would generate enough interest from word of mouth that you’d never have to spend a dime on advertising and marketing. But in the real world, this is very rarely the case. Even the most established brands spend big money on advertising, marketing, and branding.
Don’t miss your opportunity to create a reasonable advertising and marketing budget before you open your doors to the public. This can include everything from pay per click advertising to content and social media marketing.
Just when you think you have accounted for every expense, this financial roadblock pops up and knocks you off your feet.
The type of insurance you require depends largely on the specifics of your business, such as your industry and number of employees.
Some of the most common types of business insurance include:
- General liability insurance.
- Professional liability insurance.
- Medical insurance.
- Life insurance.
- Short and long-term disability insurance.
- Workers’ compensation insurance.
The premiums associated with these types of insurance policies, among others, can quickly eat into your revenue. Planning for these costs upfront is imperative to your long-term success.
What’s Your Plan?
By now, you understand that there are a variety of financial hurdles standing between your startup and success.
But what you may not understand is that there are things you can do to protect your business, both now and in the future. Here are three ideas:
- Create a detailed business plan: Writing a business plan is easier said than done, but some resources can ease the stress and difficulties associated with doing so. Your business plan should outline everything from funding to financial projections to a marketing budget (and that’s just the start).
- Think about the future: It’s not always easy to think past the startup phase. Furthermore, you don’t want to get ahead of yourself. However, it’s imperative to make financial decisions based on where you see your company in the future. By carefully assessing other companies in your space, you’ll learn more about how to save money and make decisions that position your business for long-term success.
- Get the help you need: If there’s anything you don’t understand, such as the legal implications of starting a business, don’t hesitate to consult with a professional. This takes all the guesswork out of the process, which gives you peace of mind during this critical stage.
Regardless of how well you plan, you’re likely to come face to face with a few financial hurdles. Even when they appear insurmountable, the right approach will allow you to get on the right track.
Noah Rue is a journalist and content writer, fascinated with the intersection between global health, personal wellness, and modern technology. When he isn’t searching out his next great writing opportunity, Noah likes to shut off his devices and head to the mountains to disconnect.