We’ve all seen the statistics on how many businesses fail within the first few years of operation, and the current pandemic may accelerate that struggle for some startups. After fielding literally thousands of questions from small business owners during the past few months at Nav, we’ve identified four ways businesses are setting themselves up to fail. These businesses are making mistakes that not only hurt them during the current crisis, but may increase the chances that they will struggle in the years ahead.
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If you are doubling down and want to take your best shot at making sure your business is still around in the next five to 10 years or more, here are four things you need to stop doing:
Stop mixing business and personal finances
Many business owners found themselves scrambling to apply for Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (PPP) loans, but found themselves struggling to qualify in part because they hadn’t separated their business and personal finances. Some were told (incorrectly) by representatives at the SBA that they couldn’t get an EIDL loan without a business bank account. Others were trying to upload documentation to their bank that didn’t clearly separate out business versus personal income or expenditures.
If you haven’t been using a business bank account only for business expenses and a personal account only for personal purchases, it’s time to establish a business bank account and use it exclusively for business income and expenditures.
Not only will tax time become much easier, you may also find it easier to qualify for certain types of financing. That’s because an increasing number of lenders (especially online lenders) will want you to link your business bank account to analyze your revenues. Meaning having one of these accounts could open up business opportunities.
While you’re at it, get a business credit card so you’re not using your personal credit to finance your business. Many of these cards don’t report to personal credit unless you default, but do report to business credit, meaning they can help you more effectively separate your business and personal credit.
Stop operating without a business structure
The large majority of businesses in America operate as unincorporated businesses, meaning they don’t have a formal business structure such as an LLC, S Corporation or C Corporation. Don’t wait until your business is “big enough” to take this step.
There are many benefits to forming a legal business structure, including asset protection and potential tax benefits. In addition, when you choose a business structure:
- Clients take you more seriously
- You can build business credit easier and more effectively
- You may be eligible for more financing as some lenders require this
Stop putting off your bookkeeping
I ran my own business for more than a decade and I won’t lie: I hated bookkeeping. Despite the fact that I am in the financial services field, I never enjoyed that task and often found myself procrastinating. But it came back to bite me more than once when I found myself digging for receipts or records, or trying to figure out what a deposit or withdrawal was for.
Don’t follow my example. If you don’t want to do bookkeeping yourself, hire a bookkeeper and make sure your accounts are updated monthly. Don’t wait until tax time; keeping records year-round is important for tax purposes, but also when it comes to financing. An increasing number of lenders require up-to-date financials so they can understand how your business has been doing not just last year, but last month, too.
Stop paying yourself last
A common complaint we heard from business owners who were applying for PPP loans was that they didn’t qualify for much because they don’t pay themselves much. (PPP loan amounts were based on payroll). Instead, they just take money out of their business when they need it, or pay a very minimal salary to avoid payroll taxes, and then pay themselves “owner’s draw” or “distributions” that aren’t subject to those taxes. Those approaches reduced their payroll, and as a result, reduced the amount they could borrow.
Pay yourself first, never last.
Huddle with your accountant and come up with a strategy that will allow you to pay yourself an appropriate and reasonable salary. If you need money from your business, pay yourself, then pay your personal expenses from your personal accounts.
While this sounds obvious, as a busy entrepreneur it’s easy to lose sight of your role in your business. You are likely a crucial part of your business, and you need to pay yourself accordingly.
Originally published Aug. 24, 2020.