Starting a new business is expensive. Invariably there’ll be outlays before revenue starts coming in – often large amounts of money.
For many founders this can mean taking on outside equity investors, while others resort to debt that can haunt them for years. When starting up, it’s important to avoid debt as much as possible. Below are some of the ins and outs for doing just that:
In: Bootstrap as much as possible. This means supporting yourself by other means with as little cash flow as possible. If you have a job, keep working while you get started. Do freelance or consulting work to build new revenue streams and make yourself less dependent on your day job, while devoting time during evenings and weekends toward working on your own business. The goal is to keep other lines of cash flow going while building your business. This will make you less dependent on your new business to support you, and reduce the impact of reduced or gapped cash flow in the beginning. It will also make it easier to finance early stage growth.
Also in: Keep business expenses as low as possible. Delay hires as long as you can, and reduce overhead wherever possible. When looking for key team members, consider bringing them on as co-founders rather than employees, giving them equity instead of a regular paycheck. Also, be careful with vendors or outside contractors. While it’s important to get work done well, you absolutely cannot afford to overpay. With only a few exceptions, things can be revamped or improved later on, but you can’t get money back once it’s spent. Some things need to be done professionally, including any legal work or the setting up of your company’s finances; but websites will be redone, logos and packaging will change over time.
Now for the outs:
- Office space is almost never a good idea. If you absolutely need a place to meet with clients, try subletting or using a shared office space environment. Taking on the expense of a dedicated office is a huge commitment and will absorb funds that could be put to better use later on for strategic growth or just supporting yourself until revenue starts coming in.
- Paying yourself too early will kill your business. Don’t plan for your business to support you for quite some time. Revenue takes a long time to start coming in and, when it does, most will be reinvested in the business or used towards paying early expenses.
- It’s tempting for founders of new companies to use credit cards or a line of credit to finance their business or support themselves in the early stages. DON’T. Interest and fees that come with borrowing generate additional unnecessary expenses. Taking on debt means that a portion of any revenue earned in the future is already spoken for. When you borrow, what you’re doing is essentially bringing forward future earnings, which is a very bad idea when your company’s concept isn’t proven yet. Once your company has some revenue and a proven concept, borrowing a modest amount can be appropriate for financing growth by bringing forward future revenue that is more probable, but borrowing should not be used for the early stages.
If you feel that you need to borrow in order to get a startup off the ground, you need to rethink whether this is the right time to start your company. If you don’t have a job to support yourself while building a new business, you may need to refocus your efforts on finding work so you can pay bills and reserve evenings and weekends for working on your business. If you already have debt (student loans, credit card debt, old medical bills), you may need to keep your nose to the grindstone a little longer in a regular day job until you can get your debt paid down.
Statistically, most start-ups fail. Add in those that achieve far less success than founders anticipated (these are companies that make some money, but not enough for employees and founders to make a good living), and the number is approaching 100%. Follow your bliss, chase your dreams; but do it carefully. Cautious optimism is the key. Don’t put yourself in a position where you can’t pay your bills or support yourself. No business is worth that kind of stress. One of the goals for start-up founders is financial independence. Hopefully following these guidelines will put you on the path to achieving just that, and enjoying the journey.
Pollinators would like to thank Business Woman Media for the previous article, retrieved from: https://www.thebusinesswomanmedia.com/reducing-startup-business-debt/