Thinking about starting your own business? There are a lot of financial pitfalls to avoid when starting your own business. Here is a list of 4 of my top financial tips for startups.

Tip 1: Don’t borrow money to start a business.

If you don’t have the money to start the business you are considering, choose another business.

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When you borrow money to start your own business, you’re leveraging another asset that you have to fund the new venture. You are now “on the clock”, in that your business is losing money each day in the form of interest being charged on the loan.

Adversity breeds creativity. Be creative, don’t get a loan.

Tip 2: Keep your expenses to a minimum.

There is a whole industry dedicated to signing up new small businesses to monthly plans for services.

I once bought an apartment building that had a lease on the coin-operated laundry machines, which we were required to assume at closing. It was a six-year lease, but the lease could only be cancelled during a specific window in year 5, or it would automatically renew for another 6 years. Cancel any other time than the (very short) window, and you were required to pay off the remainder of the lease.  Great for the coin-operated company, bad for me.

Try to avoid signing up for any monthly recurring payment for the first 2 months of starting your new business. Do you have a POS company trying to get you to sign up an expensive proprietary “point of sale” system with monthly maintenance? Try Stripe POS or Square POS instead.

Tip 3: Don’t give payment terms. (Get paid up front.)

This is a biggie for me, and one of my top financial tips for startups.

A lot of big companies want payment terms, some even going out 180 days. Unless you have the capital do the work for free and to give a large company a free loan for 6 months, don’t do it.

Everyone is chasing that big customer. Don’t talk yourself into giving terms by falling into the following company-destroying habits just to get the business:

“This is how our potential new customer does it, and they won’t change.”

Your potential new customer can choose to do it another way (yours), negotiate with you to find a middle ground, or take their business (and payment terms) elsewhere. EVERYTHING should be up for negotiation. If your client won’t negotiate with you, they won’t be a good client.

“We have to give terms to work with large companies.”

Not true. If large companies want your services, they can adapt to your payment terms (i.e. full payment up front).

“I can float the terms by getting a loan.”

This is also known as a loan on your receivables. You are now working for free, giving your customer a free loan, AND paying interest on money someone else owes you. Bad Move. What if you don’t get paid?

“My accounts receivable is money in the bank.”

It is only money in the bank when it is in your bank account. There are companies out there that run up huge floats on smaller companies, and then renegotiate for a lower payment later. Don’t be in the position of having to take less than invoiced because of a cash crunch. Better yet, don’t loan your customers money in the first place.

“Giving payment terms to large companies is safe, because large companies always pay their bills.”

False. Large companies do not always pay their bills, and they can quickly put you out of business. Be very careful doing business with large companies as customers.

Tip 4: Hire Slowly.

If you think you need to hire an additional employee, wait at least an additional 30 days to see if they really are needed before hiring.

Sometimes the fabric of your business morphs to accommodate the additional work via other efficiencies. Do the math on the new employee before hiring. If the employee costs $60,000 per year after salary, payroll taxes and benefits, how much do they bring in to the company? It needs to be more than just their salary to cover the risk of having the employee (workers compensation issues, HR issues, litigation risk), plus a certain amount of reward. Anything less and you are just churning money with no profit.

Still think you need to hire more personnel? During that 30 day period, pick up the slack and make a job description for the new hire. Determine whether it’s enough for a full time job.

Also, if the “slack” is a matter of you doing 5% of everyone else’s job (a typical mistake for a small business owner, and one that I have made several times), know that that is not another “job” for an additional employee. You are not going to be able to hire someone with the same drive and skillset as yourself.

Starting your own business - Top Financial Tips for Startups

These are my 4 top financial tips for startups. Starting your own business is filled with challenges, but it can be very fulfilling. One well-traveled road to financial freedom starts with opening your own business, and starting a successful company is a time-tested path to true wealth.