New year, new business: Mistakes to avoid when starting a business

The new year is an exciting time, full of promise and possibilities. Perhaps this is the year you’re finally going to fulfill your dream of launching your own business or proactively growing the one you already have.

Either way, you know that starting a business can be challenging. Your small business isn’t likely to be profitable in the first year, and not all businesses make it through the startup phase. According to the U.S. Chamber of Commerce, 18 percent of small businesses fail within the first year, and 50 percent fail within five years of opening their doors.

Despite the risks, there are many benefits to having your own business. You get to create your own schedule and maintain independence, not to mention the unlimited financial rewards and the opportunity to be innovative in your field.

With the right strategy, you can overcome the challenges, including funding and organization issues, that keep many startup business owners from growing or succeeding. Here are some of the most common mistakes small business owners make.

5 mistakes to avoid when starting a business

As the old saying goes, knowledge is power. By understanding the most common errors made by other entrepreneurs, you can take action to avoid them. Here are the top five mistakes that new business owners make when starting their small businesses.

1. Neglecting to make a business or marketing plan

You may have a groundbreaking service or product, but it won’t matter unless others know about it. And word-of-mouth won’t cut it for most businesses. One of the first things you need to do when starting a business is to develop a business plan with marketing in mind.

A business plan that incorporates marketing will help you and your team because it provides clear direction.

“You go in knowing your target market, the products and services you want to offer them and the competitive advantage that will help close the sale,” says Dequiana Jackson, a small business marketing strategist and CEO of Inspired Marketing.

For example, 61 percent of shoppers indicated that small businesses have an edge over large retailers when it comes to unique gift ideas and better customer service, according to Bankrate’s 2024 Small Business Saturday Survey. Since many customers are looking to shop with their favorite small businesses during the holiday season, creating a strategy that incorporates unique products and a quality shopping experience would be a plus in customers’ eyes.

“Enhanced customer service is an easy win for small businesses that can offer a more personalized shopping experience, like special packaging and handwritten thank you notes,” adds Jackson.

However, the online marketing domain is equally — if not more — important nowadays. Researching where your clients or customers hang out online is key, says Jackson. “If your company is B2B, it’s possible your clients are on LinkedIn looking for tips on growing their small businesses. If you have a products-based company, your customers may be on TikTok and YouTube looking for product tutorials.”

Research the market to stand out from competitors

Be sure to conduct market research, too, to identify what gaps exist in your industry. Uber, for example, entered the market when there were already multiple transportation options, but there wasn’t an easy way to order on-demand transportation services. Uber filled that gap.

“Even in less innovative businesses, you can create a competitive advantage,” Jackson says. “Perhaps the norm for getting a product in the hands of customers is six weeks, and your business has systems in place to cut that time down to three weeks. That’s an advantage customers will appreciate.”

2. Trying to do everything yourself

There’s a time to DIY and a time to delegate. Be sure to respect the difference. Hiring people to assume duties you can’t reasonably handle will be money well spent, says Neale Godfrey, small-business consultant and author of “Money Doesn’t Grow on Trees.”

“You have to accept that you are not an expert in everything,” Godfrey advises. “A lot of businesses fail because the entrepreneur is not willing to give up the reins to other people who may do it better. Yes, it’s your idea, your baby, and you’re protective about it. However, bringing experts on board will free you up so you can do what you do best.”

By delegating responsibilities to trusted staff or consultants, you will have more time and opportunity to focus on your product or service. Having a team that will work on your mission not only provides you with valuable insight and assistance, but gives you the opportunity to take a step back and develop ideas.

3. Ignoring the paperwork

As wonderful as it would be to hang your welcome sign and announce you’re open for business, you do have to follow the proper protocol. Plenty of startup business owners get into hot water because they didn’t submit the proper documentation. Essential paperwork includes:

• Permits and licenses. There are specific licenses or permits on the federal, state, county and city levels you may need to start your business. You can start by researching which licenses are required on the federal level. Contact the Small Business Administration or a Small Business Development Center near you with any questions you may have.
• Business structure. If your staff is a party of one, you may be a sole proprietor and stay that way. Or you may launch as a more formal company, such as a Limited Liability Company (LLC) or a Corporation. Which business structure you choose can depend on the number of shareholders you have and which structure gives you the best tax benefits.

The most simplistic business structure, in the beginning, will usually be best. For many, that means starting as an LLC to protect your personal assets.

— Neale Godfrey Small business consultant and author of 'Money Doesn't Grow on Trees'

• State and federal tax IDs. An Employer Identification Number (EIN) is similar to a Social Security number, but is specifically for your company to pay state and federal taxes. If you’re a sole proprietor, you will not need an EIN and can use your Social Security number instead.
• Business name. Once you know what you want your company to be called (and have made sure it’s not already taken), you’ll need to register your business with the state where you’re conducting business and possibly with the federal government.
• Business bank account. You want to avoid mixing your personal and business finances, so open a designated business bank account. Having a separate account will help you manage your taxes. To open an account, you’ll need your identification and that of any co-owners with more than a 25 percent stake, the company’s EIN (if you have one) and the name and address of your business. You’ll also need to list the legal structure of your business.
• Health insurance requirements. Generally, small businesses with fewer than 50 employees aren’t required to offer health insurance, but if you plan to grow quickly, be prepared.

4. Not having a budget

“Budgeting early and often is a critical practice to manage cash flow,” says Zainep Mahmoud, senior business director at Capital One, stressing the importance of creating a business budget for current and projected expenses. “Positive cash flow is what keeps a business afloat and drives growth.”

Creating a budget in advance will help you identify how much money you will need to meet financial commitments like payroll, rent and inventory. With the unpredictability of today’s economic landscape, you will want to plan for both seasons of profitability and downturns in the market. When the business is making more than expected or is needed, consider building emergency savings, called a contingency fund, to help you through less profitable seasons.

5. Missing out on credit card rewards

Credit cards can be a straightforward way to earn cash back or on your necessary business spending or to earn points you can then use for travel. Neglecting to earn on the purchases you’re already making is a potential mistake.

To manage short-term costs, consider getting a small business credit card. Not only are they safe and convenient payment tools, but they are also specifically designed with the small-business owner in mind. They tend to have large credit limits, and you can buy what you need without using up all your capital. Plus, you can pay over time if necessary.

The perks, rewards and benefits are different from what personal cards offer, too. “Using a business credit card as the primary purchasing solution for business expenses like inventory, equipment, software, advertising and shipping could mean thousands of dollars back to your business in the form of rewards,” says Mahmoud.

Best startup business credit cards

Choosing a business credit card can be intimidating at first, since there are many options on the market. First, consider what type of card would work best for your business spending. Would you benefit from earning flat-rate cash back on purchases? Do you travel enough for your business that it warrants applying for a travel credit card?

For personalized options, check out Bankrate’s CardMatch™ tool.

• The American Express Blue Business Cash™ Card: With no annual fee and a flat 2 percent cash back on eligible purchases (up to $50,000 spent per calendar year, then 1 percent), this is an excellent option for startup businesses. It also comes with an intro 0 percent APR on purchases for 12 months from account opening (then 17.49% - 27.49% Variable). This means for the first year of card membership, you won’t be accruing interest on your business purchases.
• Ink Business Unlimited® Credit Card: Similar to Amex Blue Business Cash, this card has no annual fee and offers 0 percent intro APR on purchases for the first 12 months of card opening (then 17.49% - 23.49% Variable). However, it has no spending cap on its cash back earnings — offering an unlimited 1.5 percent cash back on all purchases. If you’re looking for a strong welcome offer as well, this card would be a good fit since it offers $750 back after spending $6,000 in the first three months.
• Capital One Venture X Business: If you travel frequently and want to redeem rewards for hotel stays and flights, then a card like the Venture X Business may be a stronger option than cash back. This card comes with a hefty annual fee of $395, but you can offset the fee if you take advantage of its perks. This travel rewards card earns 10X points miles on hotels and rentals cars booked through Capital One Travel, 5X miles on flights booked through Capital One Travel and 2X miles on all other purchases. Capital One has numerous transfer partners to choose from.
• Ink Business Preferred® Credit Card: For a more affordable annual fee of $95, this card packs a punch. As a top-tier Chase business card, this card earns 3X points on the first $150,000 in combined spending on travel and select business categories each anniversary year (then 1X thereafter) and 1X on all other purchases. But some Chase cards are known for their boosted redemption rates — this card’s points are worth 25 percent more when redeemed for travel through the Chase Travel℠ portal.

The bottom line

Starting a business can be an exciting yet stressful experience. You’re going to make your own mistakes, but it’s also great to learn from the mistakes of others. To succeed, you want to develop a strategy for marketing your business, managing your finances, including opening appropriate business accounts and credit cards, and conducting day-to-day operations. That way, you can make business decisions for the short and long term that lead to stability and growth.