Sometimes it can be challenging as an entrepreneur or small business owner to identify potential or future mistakes and to determine how to avoid them. Find some of the common mistakes that minority or female entrepreneurs as well as small business often make and find tips on how to avoid them. As disadvantaged businesses often face unique challenges that “white male” companies do not.
The sad reality of entrepreneurship is that about 50% of all new businesses fail, with about 70% of minority (Black, Latino, Asian) businesses failing as well. Furthermore, running out of capital (money) and not doing enough up front planning is the most common reason for business failure per the SBA, in particular for female and minority owned companies. However, the reason that a lot of startups run out of capital isn’t always due to a lack of sales.
In fact, many fast-growing enterprises can run into financial difficulties if owners and managers don’t practice good cash-flow management tactics. For example, if you have a lot of revenue, but you spend an incorrect amount of all your cash on inventory or overhead, then you might not have enough cash on hand to pay all your operating expenses.
The truth is that mistakes and failures in your startup company can be learning opportunities, but they can be expensive to make and too often the mistakes are fatal. This is even more challenging for minorities and women who are often not given the same opportunities for financial assistance or second chances.
Many common startup mistakes can be avoided however. One quick and simple tip is to try looking at your business partnerships as if they were relationships, and even to think of your company as your baby and that you are the “parent”.
Using the marriage and parenting analogy when you think about an idea you have or business that you plan to start can help you stay clear of avoidable mistakes. Therefore, if you are launching a startup, you need to follow these important tips to help ensure that you have a better chance of success and that you can fully fund it. Find how to avoid some of the more costly as well as common small business or startup mistakes.
Tips to avoid mistakes that minority or female owned businesses often make
If considering partnerships, “date first before you consider marriage”. Many entrepreneurs value the idea of a business partner who stays with them through thick and thin, but it’s important to understand that just as in romantic relationships, you need to try a person out before you commit to them. If you wouldn’t marry someone you didn’t date for a while and knew a lot about, you shouldn’t commit to a partnership agreement with a business associate without a thorough knowledge of who they are.
In addition, just as a prenup is an important requirement in high-net-worth marriages, your partnership with your business associates should come with a well-thought-out partnership agreement that lays out what each partner is responsible for, and what they have a right to. There are free resources that can help small women and minority owned businesses put together an agreement from non-profit mentoring agencies.
What is a partner expected to contribute to the business? What kind of cash investment do they bring? What kind of implementation responsibilities do they have? What is the ownership percentages and breakouts? How long is the vesting period expected to be (a minimum of 12 months is usual)? These are all concerns your agreement should address.
The discovery phase of your relationship with potential partners should enable you to find answers to these questions. The more you learn about them, the more likely it is that you will make a choice that works well for you when you need to put in long hours together getting your business off the ground.
Make Rational Financial Decisions. When you feel really passionate about something, it’s often tempting to act based on your emotions. However, when it comes to making financial decisions or putting together revenue projections for your business, you must always strive to make logical decisions–decisions that come from analysis, not feelings or hope.
For example, let’s say a good friend or family member comes to you seeking a job they really aren’t qualified for. Since they are a friend, you might feel like you should give them the job. However, you should make your hiring decision based on your head – not your heart – and tell them that you can’t give them the job unless (1) you have an exact need as well as budget for that position and (2) they meet the requirements you have. Do not create a position just to help a friend or family member out. Also never just think your future revenue will boom and take off or that your margins will expand….take a conservative view. It is always better to plan for the worst and hope for the best, especially as a small business or startup that is female or minority founded.
Never Miss any Payments as a disadvantaged business. As a female, LGBTQ, Latino or minority business owner, your reputation from the dealings you have with your stakeholders (whether investors, bank, or business partners) is critical. Therefore, you never want to be known as someone untrustworthy who will rip off others or not pay your bills on time, especially as a minority or disadvantaged business. That’s why you must never miss a payment to anyone, including Employees; Creditors; Suppliers; Lenders; or Service Providers. Basically, if you owe someone money or enter into a contract, make sure you always have the cash on hand to pay them.
Don’t accept a partner just because they are willing to invest in the business. Marrying for money is never a good idea, but entrepreneurs are often known to commit to business partners simply for the investment they bring. This may be even more true for Black, Latino, and minority owned businesses or entrepreneurs who need capital. If you’re desperate, you’re likely to accept money from anyone interested, even if they might make difficult business partners.
Entrepreneurs often make the mistake of being overly optimistic when they plan for how long it will take their business to become profitable. Or Black, Latino, and Asians often start a business for a passion vs. to meet a need in the community, which is often a huge mistake to just pursue a passion vs. doing the market research. In fact, black business owners are 11% more likely to start a company as passion (which is a huge mistake).
More often than not, it takes six months or longer to break even (mush less earn a profit), making them anxious for a cash infusion, no matter where it may come from. Even then, the US Bureau of Labor Statistics shows about 50% of businesses fail in their first five year, with Black, Latino, and female owned companies even having higher failure rates.
It’s important to avoid the common mistake of excessive optimism, and plan for a long roadmap even before you start your company. This way, you are able to think of ways to attract the investment that you need without resorting to unplanned partnership invitations and other desperate measures.
It’s important to do everything in your power to keep your cash burn rate as lean as possible in (at the very minimum) the initial months. You might decide to outsource work to freelancers rather than employ people in-house, or negotiate favorable contracts with suppliers and service providers. Or you friends and family, or even a “barter” arrangement with another disadvantage businesses. Maybe a local CDFI can refer you to a women owned businesses for website development help and maybe you can provide some social networking advertising/publicity in exchange.
If you need or want to bring in investors, it’s important to think objectively about each offer that you receive. What interest rate are you borrowing money at? Why percentage of your company are you willing to give up in exchange for capital? Be sure to seek advice from an experienced third-party business lawyer to ensure that you only agree to deals that are right for you.
Take baby steps before you take bigger steps in regard to spending money and planning. Many small minority and women owned businesses overburden their cash flow too early by hiring well-paid experts, so called “experts” such as SEO companies and extra staff. Others invest heavily in a fancy website or in professional branding, committing much of their funds to these ends. Or they plan for unrealistic future sales/revenue. While all of these are meaningful moves to make, spending on them too early, long before you know exactly what you need and what your business shapes up to be, can lead to wasted resources. It isn’t uncommon for businesses to commit themselves to large expenses of these kinds and jeopardize their future. It’s a mistake to avoid.
Spending in the wrong places too early in your company’s life can end it before it gets started in earnest. You need to give your company time to grow, be as frugal as possible (even use free SEO reviews from charities) and learn as much as you can about your product and your customers, before you begin to make large investment commitments. If you wouldn’t rush a child to grow up faster than they are naturally ready for, you shouldn’t do it for a business.
Take a Long-Term Approach. The first thing you need to do when funding your startup is to take a long-term approach when planning your company’s financial needs. As Ben Franklin said, “Failure to Plan is Planning to Fail”. Planning up front is even more important for Black, women, veteran and minority owned companies, which already have a difficult enough path in front of them. This means you should determine the amount of money your business will need over the next three-to-five years. Create a pro-forma, listing expenses and revenue in detail, line by line.
If you fail to plan that far out into the future as a minority or female owned company, then you could end up running into cash-flow issues – even if your business does well in the short-term. Once you determine the amount of money needed to meet all of your operational expenses, you should add an additional 10% to cover any unexpected financial problems.
Practice Good Cash Flow Management. As mentioned earlier, poor cash flow management is one of the top reasons why many new minority as well as female owned businesses fail. Unfortunately, not every entrepreneur is a financial wizard. But you do need to know the numbers and have an ability to do math. Here are a few of the most common cash flow management mistakes that owners and managers make:. They are Unable to fund inventory or purchase orders; Unable to pay creditors or other vendors, such as the rent to the landlord or web hosting services; Owner(s) withdraw too much money from their business; Failure to pay business or income taxes on time and to withhold money each quarter for the IRS; Unable to make payroll.
If you don’t have a strong background in financial management, then you should consider hiring a business analyst or using a free, charitable mentor. Do not hesitate to ask for advice – there are many business development programs that focus on helping the disadvantaged such as Blacks, Latinos, Asian, or Women business owners. Or least look into a part-time consultant or accountant to assist you with cash flow management. Female and minority business development centers can help you find one. That way, your startup won’t be as likely to run out of capital due to poor financial management.
Separate Your Business and Personal Finances. Finally, one of the biggest mistakes that many entrepreneurs make is that they use the same bank accounts for personal and business transactions. Or they do not create an LLC or sole-proprietorship. Unfortunately, if you don’t keep your personal and business accounts separate, you could be setting yourself up for serious financial consequences or even lawsuits. You could lose your personal assets too, like a home, your savings, or retirement.
For instance, when it comes time to calculate and pay your taxes, you might have a hard time distinguishing between personal and business expenses. Furthermore, payment processors will sometimes take money out of your bank account to issue a refund. If a payment processor takes money from your personal checking account, you could wind up not having enough money to meet your living expenses. Therefore, just play it safe and create an entirely different bank account for your startup.
Don’t Borrow Money too Soon. While women and minorities struggle to get access to capital, the fact is that still most entrepreneurs eventually borrow money to help fund their startup. However, you don’t want to borrow money too early, especially at unfavorable interest rates.
For example, let’s say that you plan to launch your startup in the next couple of years. You might be tempted as a Black, Veteran or women owned business to borrow money ahead of time to make sure you have it available when you need it. However, it’s generally considered a bad idea to borrow money before you have created a business plan or have tested your product or service to see if it is viable.
Furthermore, it can be a really bad idea to start spending money before you have implemented good practices to run your business successfully. That is, you need to know who your target market is, what differentiates you as a female or minority owned business, cost of customer acquisition, etc. That’s because, without a clear business plan and good practices, it can be easy to spend money unwisely. The last thing you want to do is waste cash from a loan that you must repay.
Borrow Exactly What You Need. When you are ready to borrow money for your minority or female owned startup or small business, make sure you borrow the exact amount of money you need. Even look into microloans for Black or minority small businesses. Even if you are approved for a higher loan amount, don’t take extra money that you don’t need.
For instance, let’s say that you determine you need to borrow five hundred thousand dollars to fund your business over the next five years. However, your lender offers to loan you one million dollars. While it might be tempted to borrow more money, here’s why you shouldn’t. Don’t borrow more than you need as a female or minority owned company as you will be more tempted to spend money unwisely. Any small business needs to maintain financial discipline. A larger loan means more interest and often a higher interest rate. Therefore, you will have to divert a greater amount of cash to repaying your loan. in addition, a bigger loan means bigger business liabilities on your balance sheet. Also should you be unable to repay the loan, you could go bankrupt and lose all of your company’s assets.
Look Beyond the Interest Rate. When you are shopping for a loan, it can be tempting to settle on a lender who offers the lowest interest rates. However, when it comes to borrowing money for your startup, there are more financial terms to consider than just the interest rate. Even look for any technical help or free advice/mentoring that the lender may offer Latino, Asian, Veteran, or minority run (or female run) businesses.
For instance, you should consider the loan’s origination fee. Or even look for a Black owned bank or financial institution. Most lenders usually charge between one-to-five percent of the loan’s value for their origination fee. Therefore, if you can find a lender that only charges around one percent, you will be better off than paying five percent in most circumstances – even if you have to pay a slightly higher interest rate. Another thing to consider is that some lenders charge an early repayment penalty. Should you decide to repay a loan early, you don’t want to get hit with a costly penalty.
Don’t Repay Your Loans too quickly. Many new minority or female entrepreneurs or small business owners might be tempted to repay their loans as soon as possible. Maybe they want to build credit or fear the lender will pursue them. While debt is often viewed negatively when it comes to personal finances, it’s actually quite normal for businesses to finance their operations by borrowing money. Therefore, you shouldn’t use a lot of your cash on hand to repay your loan quickly.
That’s because, if your startup runs into some kind trouble, you want to make sure you have a good financial cushion to get through it. As it can be challenging for a disadvantaged business to take on more borrowing. Unfortunately, if you have been using all your extra money to repay your loan early, then your business might become insolvent. It’s alright to repay your loan a little early as long as you have plenty of cash to cover your expenses, as well as any potential emergencies.
Don’t Accept Your First Investment Offer. If you have a decent startup idea that sounds lucrative to many investors, you will likely get a lot of investment offers or even think about a non-traditional way to raise money, such as crowdfunding platforms for female or minority owned businesses. Just like you want to shop around for the best lender, you also want to shop around for the best investor, bank, or financial institution.
Mention your startup idea to as many people as you know to attract more potential investors. The data shows that Black, women, and Latino business owners often borrow from friends and family and use them for investors. Remember, you want to keep as much equity (ownership) of your company as possible. If you give away more than 50% of your company, then you no longer control it. Therefore, you want to make sure that you get the very best deal from investors. You might need to hire a financial consultant to review your investment offers.
View your business in a personal way to help avoid mistakes
In short, the way you manage your startup’s or small business funding and the ways you try to avoid common small business mistakes will play a big role in whether your new minority or women owned venture will be a success. Therefore, you need to take a long-term view of your venture and practice good cash flow management, make decisions based on data (and not emotions), and enter into the right partnerships among other decisions. When it comes to lenders and investors, look around to make sure you get the best funding offers. Make decisions about your business like it it your child…love it and appreciate the sacrifices you made as a female or minority to even start a company. Above all, strive to make sound financial decisions.
Whether it’s dating, marriage, parenting, or business, you’ll experience high points and low points, and days when you want to give up. Having a good, sensible, like-minded business partner along for the ride, making decisions like the business is your child, and giving your business time to grow as you learn the ropes can help. Using professional advice or lenders, such as CDFI loans for minorities, may also assist. Doing all this can, down the road, hopefully make for a pleasant and rewarding experience.
By Jon McNamara