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Top 5 Financial Challenges for Startup Businesses

Image by Werner Heiber from Pixabay

The road in front of any startup is filled with a multitude of challenges, with the ones that most often prove to be the hardest to overcome having financial nature. It is almost unheard of for a startup to have enough readily available capital to execute its business plan flawlessly. Instead, business owners and founders have to constantly juggle different sources of funding depending on the startup’s unique circumstances, including its position on the market, growth expectations, product scaling, and more.

Managing small business debt at this stage is unavoidable both as the cost of acquiring funds and as a result of unforeseen events such as an increase in the price of the raw materials, reduced customer buying, or a significant delay in receiving payment from a client. Turning to an expert may lessen the burden when having to deal with the complexities of such situations without having experience in the field.

Securing The Necessary Funds

The starting point and the first major hurdle that any startup faces is securing sufficient funds to keep them going. Business owners must have a clear idea of the capital they would need to cover their operational expenses, cash needs and, if possible, set aside a fund for unexpected situations. Picking the right source of finance is paramount. Startups can apply for conventional bank loans, try to win grants, look for angel investors, or seek out venture capital. Each source has its own characteristics and requirements, and startups should do their research in order to pinpoint the ones that align the most with their goals.

Loans, for example, may be difficult to acquire when you are a fresh startup, as most banks could view this proposition as far too risky and either reject it outright or place far too unfavorable conditions. Grants are given out by specific institutions, government agencies, etc., and do not have to be paid back. However, winning a grant means competing with numerous other candidates and being selected out of all of them. Angel investors and venture capitalists are other key sources of potential funds. The difference between them is that angel investors mainly provide funds for startups they believe in and want to succeed, while venture capitalists are more focused on the exact profits they could gain for funding such a risky endeavor.

Managing Your Money

Getting enough money to lift your startup from the ground is crucial, but it brings on new challenges. Many startups experience serious issues stemming from the lack of proper money management. Business owners and founders need to have a crystal clear understanding of the numerous moving parts that comprise their company’s finances. All day-to-day expenses must be accounted for, the fixed and variable costs must be covered, and the timely payments for outside services and vendors must be ensured. At the same time, the incoming cash flow could become more and more complex as the startup expands. Any mismatches or false assumptions about the current financial state of the operation could have disastrous results, so it may be time to think about hiring a dedicated accountant or consulting a specialized service.

External Factors

Startups are far more susceptible to the overall market and economic conditions due to their limited budget, lack of options for cutting costs, and, in most cases, offering a single product or service. Negative external factors such as economic slowdown, shift to a work from home model, measures affecting specific sectors (the restrictions imposed due to the COVID-19 pandemic), or even country-specific events such as Brexit can have a rippling effect and cause issues for seemingly disconnected businesses.

Insolvency

Among the problems associated with running a startup, falling into insolvency may seem like the scariest one. What business owners and founders should keep in mind is that this doesn’t necessarily mean the end of their dream. Many businesses have managed to turn their situation around and emerge even stronger afterward. Navigating this complicated process and picking the right course of action in a timely manner is critical. That is why turning to a professional insolvency service could be worth it as the experts could provide your solutions that otherwise might have been overlooked.

Avoid Client Dependence

Startups should strive to diversify their client base or risk facing significant financial troubles. Indeed, relying on a single client for the majority of the income will put your business operation in quite a disadvantageous position. Even if the current client fulfills their payments right on time, doesn’t complain about the price of the goods or services, and is perfectly willing to continue the current arrangement for the foreseeable future, you should still focus on finding other clients. After all, any disruptions in the operations of the major client will lead to your startup losing a devastating amount of its income.