Today, we are introducing a guest blogger: Nate Matherson, Co-founder and CEO of LendEDU. A graduate of the Iowa Startup Accelerator and Y Combinator, as well as a MicroVentures portfolio company, LendEDU is a marketplace for student loans, student loan refinancing, and student loan consolidation. Today, Nate is sharing his financial guidelines for other first-time founders as they begin their entrepreneurship journey.
You had a great idea, but rather than just sitting on the couch and binge watching your favorite show, you took action and made it a business.
As you’ve quickly figured out, being a first-time startup founder is time consuming. You’re likely working late nights and hustling to get your product or services out the door. But given that you’ve never done this before, you’re also liable to make some big mistakes.
As the founder of LendEDU, an online financial marketplace, I’ve been there. When I started my company, I was still finishing college. Together, my co-founder and I made a number of mistakes as first-time founders – but you don’t have to. Here are five guidelines to follow to make sure that your startup finances are a success:
- Keep Your Personal and Business Expenses Separate. You might think it’s easier to just use your personal bank account or credit card to pay for your business expenses. However, the last thing you want to do is comb through statements at the end of every month to figure out which expenses were personal and which were for business. Mixing your expenses also means that it can be harder to properly evaluate your business – which may mean you’ll look unprofessional to potential investors or lenders. Also, if you set up your company as a corporation or LLC to limit your liability, using your personal bank account could compromise that protection since the argument could be made that you’re the same entity as your business.
- Build Your Business Credit. One of the first things that startup founders should be thinking about is how to build their business credit. That’s because businesses often need to borrow money in order to finance things like new equipment or expansions. In the beginning, you’ll have to personally co-sign any loans to your business since you don’t have business credit. If you take out loans solely in your own name, those loans can affect your personal credit. It also means that your business can only borrow what you can personally qualify for. In contrast, if you start building your business credit, you could be eligible to borrow without co-signing your business loan and access more money or better rates. Not building good business credit right from the beginning could potentially limit your business later on. Even if you don’t need to borrow money for your business, potential partners or clients could look at your business credit before doing business with you. If yours is low, you might lose opportunities.
- Limit Your Burn Rate. It costs money to make money, right? Well, if you spend too much money you could find yourself facing cash flow issues and having to close your business. That’s why you should pay close attention to how much you’re spending compared to how much money you’re bringing in or have in the bank. You should also take action to limit your burn rate or make it easier to adjust your burn rate. For example, you might want to hire freelancers rather than full-time employees in some roles to give you more flexibility on costs if you have a slow month. You might also want to limit taking on large obligations – such as expensive rent or too much debt – if you think it will be difficult to repay your debt or pay your rent during your business’s slow season. The more you can do to limit your burn rate the better.
- Have an Emergency Fund. When it comes to building a business, it’s important that both you and your business are protected financially. That’s why you should have a personal emergency fund saved to help you get through lean months in your startup or to cover your expenses before you start generating revenue via your company. This emergency fund can also allow you to keep your money invested in your company in order to fuel its growth rather than having to take it out in order to pay your bills. Many experts suggest having an emergency fund to cover your expenses for anywhere from six months to one year.
- Get Mentors. The worst mistake founders can make is believing that they can do everything themselves. You don’t know what you don’t know. You can potentially save time and money if you recruit business mentors with skills or experience in relevant areas to sit on your board or act as advisors. Some of these mentors might be investors in your company while others might be people you approach to provide you with support. You might also find mentors via a business accelerator, coworking hub, or business networking organization. No matter how you find them, make sure to use your mentor’s business expertise in order to supplement your own. By learning from their experience and mistakes, you’ll ensure that you don’t make the same needless mistakes and get great advice when you need it.
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