Small businesses can mitigate or even eliminate many problems by heeding these warnings
Editor's note: This is part one of two parts of the Dont's or pitfalls for small business owners.
There are many small business pratices or to do's when operating or starting a small business. Take note of these pitfalls to help save time, money and better ensure business growth and success.
1. Do not co-mingle your personal and business funds.
Open a bank account for your business keeping all transactions separate from your personal accounts. You will need to apply for an EIN number to open a corporate account. And, apply for another credit card that you use solely for business charges. Your bookkeeping system will be simplified for tax purposes and your banker will consider you a commercial account.
2. Do not ignore the importance of having a good personal credit score. Use 680 as a benchmark.
A bankruptcy, a foreclosure, a short sale, and a loan modification will be on your credit report for not less than 5 years. If you have a business associate who has serious credit issues and you intend to borrow funds, ask him or her to avoid an ownership position until the credit issues are resolved and not on his credit report. However, be aware that lenders will average credit scores of owners of 20% or more of a business, so one weak score may not have a major effect. The ratings used by lenders may differ from the credit scores obtained by credit bureaus. Lenders use FICO (Fair Isaac Corporation) formula to determine credit scores.
3. Do not commence business operations until all the needed funds are available.
Don't think about signing a lease, or any contract until you are assured of the availability of all funds needed from pre -opening to break even. You are not ready to open a business until you know all the costs and know how much working capital you will need until you can cover your expenses. You can ask a perspective landlord for a letter of intent which you can present to a lender, but do not sign a lease or other contractual agreements until your financing is in place.
4. Do not use short term debt for the purchase of equipment that has a long life cycle.
Do not use working capital for an item that has an long life cycle such as a car or truck or equipment that will be used for many years. That includes the acquisition of real estate. Never use credit cards to finance items with a long life cycle. Be careful about using credit cards to pay operating expenses, even if you intend to use the funds for a short period of time, you cannot control all payment issues. Credit cards can readily be obtained, but payments can be expensive and can impede the growth of a company.
5. Do not sign a partnership or a joint venture agreement that does not have a buy-out provision.
No one can project the future. Therefore, you need to have a method of unwinding a contract by having a provision to buy out an interest in a partnership or purchase stock from individuals when the contract does not meet the needs of all parties. You can seek counsel or find an on line document that addresses the concerns of the parties. Keep it simple, but make certain it is relevant.
Next- Small Business Don'ts #5-#10
About the author
Marjorie Weber has been providing consulting service to SMEs in Miami Dade for the past 15 years. She served as Chair of SCORE Miami Dade from 2010 to 2014 and is currently a financial consultant for SBDC/FIU. She also serves as an advisor to the Goldman Sachs 10,000 small business program at Miami Dade College. and is a guest speaker for the SBA/FIU Emerging Leaders Initiative. She is a liaison with banks and alternative lenders on behalf of SMEs. She has been a real estate investment advisor in Miami since 1977. She commenced her real estate career in New York with Sonnenblick Goldman in 1964. She is considered a woman who broke the glass ceiling.