The last thing eager entrepreneurs want to hear is that they should reconsider starting their own businesses. Such discouraging feedback might appear to serve no purpose except to put a damper on your vision but it needs to be said if only to help you brace yourself for the harsh reality that many startups — even those that show great potential — fail. The biggest red flag is usually poor financial planning.
“If more of the 80 percent of small businesses that fail had but hesitated and considered why they were getting into business, we’d probably have fewer businesses and more successes in those that did exist,” according to Susan Payton of Forbes.
Before handing in your resignation, here are six reasons why it’s not such a hot idea to dive headfirst into that startup venture.
1. You Have Bad or No Credit
A poor credit standing could negatively affect the type of funding you can receive — if you’re approved at all — and that can trigger negative repercussions. “If you are a small business owner, your personal credit is a major factor influencing your company’s access to capital,” according to Carolyn M. Brown of Black Enterprise.
A 2006 report for the U.S. Small Business Administration revealed that 71% of banks used small business owners’ credit scores as the deciding factor to approve or decline small business loans. If startup owners who are rejected for business loans turn to second mortgages or high-interest personal loans to bankroll their businesses, they can get into serious financial trouble, especially if their businesses fail. Many people would benefit from taking this approach instead: Fix your credit first; go into business second.
2. You Have Loads of Student Loan Debt
Some of the hungriest Gen Y and millennial entrepreneurs driven to succeed are also recent graduates with mountains of student debt. Your new startup might generate some profit, but you’ll be faced with choosing between the lesser of two evils: Use the profit to pay down your debt instead of your overhead or let your debt go delinquent and suffer the consequences.
“The reality is banks won’t touch you holding a large note already,” according to retail blogger Bob Phibbs. “Can you handle the stress of mounting debt as you inch toward profitability?” Even if you convince family, friends or complete strangers to invest in you, you’ll still have to make your student loan payments, Phibbs wrote on his blog, The Retail Doctor.
With too much student debt, “there’s no escaping the fact that you are digging the hole deeper and reducing your financial flexibility,” according to Monica Mehta of Entrepreneur. “The preferred solution would be to find a way to save as much money as you can during the startup phase and leave the structure of your debt unchanged.”
3. Your Money Management Skills Are Lacking
If your accounting skills are merely passable, that might be OK when your business is still starting up in simple mode. But running a company is more than just debits and credits. If you don’t have what it takes to manage complex financial matters, your revenues could quickly become expenses, and your might end up driving potential partners away.
“If you start comingling funds or dipping into the business coffers, or you make a complete mess of your books — or worse, don’t keep books at all — you are sabotaging your business,” said Amy Weicker, director of marketing, editor and publicist for Rock Bottom Publishing. “You can get away with it for a little while, but the first time an investor discovers your financial mess during due diligence, you’re going to have a hard time regaining their confidence.”
4. You’re Only in It for the Money
You won’t be able to hide the fact that you only have dollar signs in your eyes and no other aspirations. “People will see the difference between someone who eats, sleeps and breathes their company and someone who is looking for a quick check,” said Cody McGraw, founder of SCOUT Military Discounts.
If this is you, then you shouldn’t quit your day job. Few people become millionaires, and those who do are one in a million. “A few success stories have put stars in people’s eyes and make them think they can easily start a business and become super rich,” according to Payton. “Think of the average small business: Do you think your plumber is rolling in it?”
“Millionaire entrepreneurs exist, but they’re rare,” Payton wrote. “You seriously need to readjust your expectations.”
5. You’re Financially and Emotionally Unprepared
Remember the old saying that it takes money to make money? It’s usually true. Starting a business can require a significant financial investment before you’ve even earned your first dime. For solo entrepreneurs, getting startup capital can be difficult without the right people around to help.
“If you haven’t saved enough money and built a support network to help you through the tough times, you’ll probably end up back at that corporate job sooner than you’d like,” said John Boese, co-founder of GoFindFriends. “Ask yourself the question of what you’ll do when everything goes wrong. If you don’t have an answer for this, then you’re not ready.”
Boese said people who want to start businesses need to reflect on their finances and relationships before going it alone. They need to ask themselves if they have enough money saved to live comfortably during the startup phase and if they have someone to talk to if everything seems to be going in the wrong direction. “If you haven’t thought about these issues, then your exciting, adventurous startup life will quickly turn into a life riddled with worry and self-doubt,” he said.
6. You Don’t Have a Solid Business Plan
Even the best-laid plans often go awry. If you have no business strategy in place, then you’re really in trouble from the start. Even a person with the strongest, most innovative startup idea will struggle to get the business off the ground without an actionable business blueprint.
“The best product isn’t always the one that takes off,” said Weicker. “Your customers won’t just magically find you and adopt your product or service because it’s better. You have to be realistic about the work and time required to find a market fit and gain a share of the market.”
“Those who succeed are those willing to work the hardest and the smartest,” said Weicker.