The first twelve months are key. You’re against the clock, and many other metrics, to succeed. As we’ve helped literally thousands of entrepreneurs overcome their initial financing difficulties, we’ve seen a lot of problems that could be easily avoided. Here’s the first in a series on blogs discussing the most common start-up financing mistakes, and how to give yourself a fighting chance.
Forming an entity & establishing ownership percentages
There’s a fair chance you started your business with either a business partner or a spouse. Did you think about their credit profiles when deciding who the owners would be, and how much of the business they would own?
As per a study done by Lendio (a SME loan provider), 59% of visitors to their site required $50,000 or less to start their business. Despite not being exorbitant amounts, you still need to bear in mind the credit ratings of the majority owner and the business partner/spouse.
If one has great credit, and the other, not so, then these are aspects you need to consider (or speak about with your attorney) when forming your entity.
Many business loans require anyone who owns more than 20% to be included in the credit check, and to be able to personally make sure they can make the repayment of the loan that is being applied for. Is your business partner/spouse willing to take advantage of their superb credit rating to help get the business started?
If you are one of the many entrepreneurs who only need $50,000 (or less) to start your business, then it is possible to obtain all of this with a few credit cards. Take advantage of the cards that offer 0% rates and low monthly payments.
Many credit card lenders only require you own a minimum of 1% of the business to borrow on behalf of the company. Make sure personal and business credit cards are kept separate to avoid further trouble
Say, for example, you and your business partner had terrible credit. One way around this, would be to tell your attorney that your (or your business partner’s) wife owns 1% of the company, as she has great credit. Figure out a way how to build her into the company so that her involvement is for that exact role (to make use of her credit!).
Your attorney can help you with this, but do bear in mind that this is only one example, and may not be right for your business. This is a solution that is rarely thought of at the inception of a business, but if done right, could save you a lot of headaches further down the line. Don’t wait until it’s too late!