New entrepreneurs can be faced with various financial challenges, which can affect their business’s profitability and finally its long-term existence. Some entrepreneurs begin their businesses only after having a considerable professional run, while some of them start right after leaving college. Entrepreneurs belonging to both these groups can be successful with their startups. However, each group will face a different set of challenges based on their age and experience. However, there are some challenges that are common to all new entrepreneurs.
Let us take a look at the funding challenges that startups often face:
#1 Getting business funding
Getting business funding is a tough job, especially for startups. Banks are often hesitant to lend money to new businesses. Also, any potential investor may steer away from new entrepreneurs since they have no prior experience. What is required is a well-drafted business plan that clearly defines the goals and can convince the investors of its credibility. Besides this, there can be other sources of financing, such as grants from Small Business Administration, liberty lending, or borrowing from friends or family.
#2 Personal capitals
Capital is vital for any business venture. In fact, it can take years for your business to start making profits. Hence, entrepreneurs will need some amount of personal capital to pay for the cost of marketing, hiring staff, renting premises, leasing or buying equipment, and so on. Entrepreneurs, who had a professional run earlier, might have made some savings so that they can pull through the initial phases of their startups. However, for young entrepreneurs, who are perhaps paying off their student loans, surviving through the initial stages with a lack of personal capital would be a challenge.
#3 Credit history
Age makes a huge difference in deciding the financing for the startups. The older you are the better is your credit history. Middle-aged entrepreneurs get the time to build a solid and high credit rating. For young entrepreneurs, their financial mistakes will prominently feature in their credit ratings. This leads the loan and credit card companies to either turn down their business proposals or offer high rates of interest.
#4 Networking contacts
When you are fresh out of college/university, your network will include your school or college mates, who are also struggling to make their mark. The web of networking required to find potential investors is missing. While searching for investors, sometimes your network contacts might guide you to venture capitalists. But if you do not have rock solid networking contacts, then arranging capital for your business becomes tougher.
In addition to this, the lack of experience disables the young entrepreneurs to market their business ideas effectively. Under such circumstances, turning profits from the business venture can take a few years.
#5 Negative cash flow
What is a negative cash flow? Cash flow usually refers to the amount of money that is invested in the business in form of revenue collected from sales. The problem that startups often face regarding the revenues is that they need time to develop and maintain a positive cash flow. This is very difficult to achieve during the initial stages when the business is yet to establish a regular client base and has to spend on rent and hiring employees. Often such expenses lead to a negative cash flow.
#6 Bearing debt
It is not a nice feeling to own money, but debts can be both good and bad, depending on the loan and its purpose. If it is a well-planned, short-term business loan that is repayable and with right APR rates, then it is a brilliant way to deal with the cash flow issues for a startup. However, the young entrepreneurs are often reluctant of getting into debts at the very beginning of their business. In addition to paying the debts, there are several other expenses that the business faces initially. In addition, some of the young entrepreneurs are perhaps still paying off their student loans. Bearing two debts at a time naturally seems daunting.
#7 Insurance coverage
It is a thumb rule for any business that the owners must carry adequate insurance so as to cover any expenses that they are unable to pay from their own pockets. However, some business owners do not choose items, such as health, disability or liability insurance so that the expenses are reduced. What you need to understand here is a medical liability or a huge liability can actually spell doom for your business. Hence, a proper insurance coverage is necessary for all kinds of businesses.
#8 Age discrimination
There is always a struggle between youth and experience. Youth brings in a lot of enthusiasm and energy, but it is only when you get older, that experiences make you wiser and responsible. This is usually a perspective that young entrepreneurs face while looking for business funding. Age plays a crucial role when you approach investors to convince them about your business plan and that you are a reasonable financial risk.
#9 Marketing funds
Promoting your products and services is one of the essential ways to reach out to your target audience. However, the issue with startups is that the entrepreneurs are often tempted to spend on expensive advertising campaigns through television. For them, it is an opportunity to reach out to a large number of people. While the intention is correct, but the fun restrictions must be taken into account. Mismanaging marketing funds will only incur losses on their business. In contrast, there are business owners who feel that they have very little funding to organize for marketing strategies. As a result, people are hardly aware of their business. This makes it quite difficult to build a sustainable customer base.
If you are a young entrepreneur, with little experience and trying hard to start your own business, the first thing that you need to do is identify the challenges that your startup will face while arranging for business funds. Once you have identified the challenges, look for workarounds. Starting young might sound difficult, but achieving young is not impossible. There have been many young achievers in the past. The trick is to think through your plans and be prepared for challenges, with well-thought ways to compensate them.