Top 3 Financial Errors for Entrepreneurs to Avoid

The commitment and drive of entrepreneurs is essential to business success. Equally important is avoiding some basic errors that are unfortunately too common among new entrepreneurs.

Error Number 1

Thinking that a lot of money is required to fund a new business. Entrepreneurs should not delay proceeding into a commercial venture just because they haven’t raised $1,000,000. The typical start-up operation requires only about $25,000. If enormous opportunities are presented after launch, raising the required capital becomes another step. Initially, the company simply needs to get going. To accomplish this, entrepreneurs can acquire inventory on credit, rent instead of buy, and pay commissions instead of salaries.

Error Number 2

Believing that all angel investors are wealthy individuals. Finding angels to fund the initial expansion stages of a new venture greatly enhances success. A mistake made by entrepreneurs is overlooking angels in obvious places. Not all of the people making angel investments are wealthy according to the SEC definition of an accredited investor. In fact, almost three-fourths of angel investor—who are not friends and family of the entrepreneurs—do not fall within the SEC definition of wealthy. In one study, 32 percent of these outside investors to new companies have a household income of just $40,000 per year and 17 percent of the angels have a negative net worth.

Error Number 3

Overlooking borrowed funds. Smart entrepreneurs know that a little more than half of the capitalization for companies less than two years old is provided by borrowing. A minority of money is raised by entrepreneurs giving equity in their companies. Young companies can still borrow and should not fail to consider applying for loans. In fact, Federal Reserve data show that banks are providing 16 percent of all the funding to companies less than two years old. That may sound like a small percentage but the next highest source of money is trade creditors at 3 percent. The number of dollars from banks is still higher than angel investors, such as friends and family. This may not be the case at the beginning of operations but bank lending seems to quickly become a valuable source of funds before the end of two years.