Starting an online business? Avoid these 3 common debt traps

Something that is often overlooked in growing a business is staying out of harmful debt. One person who knows a great deal about this is Michael Dolen. Today Michael shares some great tips on how to avoid debt traps. His information may surprise you and give you a wake up call. (Editor – Kathleen Gage)

An online business should be a lean and mean operation. Unfortunately, it doesn’t always turn out that way. As someone who has been working in the online space for over a decade now – through independent as well as group ventures – I’ve had my fair share of successes and failures. What I’m about to share with you are three of the most common debt traps you can encounter when starting your online business.

#1. Avoid long-term contracts

Let’s be honest here… no matter how good your idea is, it’s impossible to know in advance whether it will sizzle or fizzle in the marketplace. Simply put, there are too many variables at play, many of which you have zero control over.

So with that said, does it make any sense to lock yourself into long term contracts? Probably not!

When you are starting out, I have found it’s best to “pay as you go” as much as possible. For example, even though it’s cheaper, don’t sign-up for a 24 or 36 month contract for webhosting when you don’t even know yet how well your business will perform.

For my primary business, which is an affiliate website for credit card offers, I stuck with month-to-month hosting plans for the first 3 years. Not only did this allow me to test the waters, but it also prevented me from being locked into a contract for a specific hardware configuration. This was a good thing, because my hardware needs 2 and 3 years out were totally different than what I had envisioned when I started.

#2: Online ads aren’t for amateurs

When you really know what you’re doing, Google Adwords and other advertising channels can be a great way to bring in customers. But if you think you can jump in and learn as you go, then think again! I cannot even begin to tell you how many horror stories I have heard from small business owners who have raked up massive credit card bills, sometimes unknowingly, through online advertising. Here’s why…

When you signup for Google Adwords, Microsoft Adcenter, etc., you enter your credit card information and then start creating campaigns. If you don’t know what you’re doing, it’s easy to get in way over your head, fast.

For example, let’s say I wanted to buy ads for the phrase “cash back credit cards” so that when people searched for that phrase on Google, an ad for my site would be shown. The expected number of times it will be shown can vary greatly based on whether I select broad, phrase, or exact match for my campaign. To give you an idea, last month there were 40,500 “broad” matches for cash back credit cards, but only 5,400 for “exact.”

Under those circumstances, if I selected “broad” and didn’t know what that meant, my ad would likely be shown a lot more often – and in turn – I could easily end up spending more, faster than expected.

However the quickest way to break the piggy bank is by selecting the display network, rather than the search network. The latter of which will mean your ad will only be shown when someone searches for your keywords. But when you select display (which is or at least used to be selected by default) then your ad will also be shown on any webpage which matches those keywords and displays Google Ads. Translation? The number of impressions will skyrocket! A good thing if you know what you’re doing, but a bad thing if you’re still learning the game.

By setting appropriate daily spending limits and bids per click, these problems can be avoided altogether. But if you don’t know what you’re doing, you can blow through money fast, like this guy who was new to the game and allegedly spent $30,000 overnight by accident.

The lesson? Make sure you know what you’re doing! This especially is important since your competitors probably have their ads down to a science. Can you say the same about your own level of expertise? If not, then you have some learning to do before getting your feet wet.

#3: Don’t overspend on design

Remember what I mentioned above about my hardware needs for CreditCardForum being significantly different 2- 3 years out than what they were on day one? Well, the same holds true when it comes to web design, software, and more. You need to be flexible because your needs will change.

Your online business will evolve and to be quite frank with you, it’s impossible to know what its finished form should be when you’re just starting out. There may be a feature or design aspect of your site which seemed like the perfect idea on day 1. But months later, you realize it needs to be something different.

For this reason, don’t get too obsessed with creating the perfect design for your site. I’ve consulted businesses that have gone into debt by charging tens of thousands of dollars to their credit card, to pay for design work. They thought it was a wise investment since the design was perfect (even though they hadn’t launched yet). Then down the road after they’re in operation, they come to find out they will need to cough up big bucks yet again, because what they envisioned as being the perfect idea actually needs some major adjustments.

Don’t get me wrong, you still want an aesthetically pleasing, professional looking site when you launch. But don’t spend with the mindset that it will be a one-time expense, because I guarantee you there will be many changes you want later on.

About The Author: Michael Dolen is an internet entrepreneur of over a decade. Since founding it in 2008, his primary venture (and most successful to date) has been CreditCardForum, which is a leading website for credit card ratings. The site promotes products and services for a number of large financial institutions including American Express, Discover, Citi, Chase, Capital One, HSBC, Equifax, and others. He has been featured in The New York Times, U.S. News & World Report, MSN Money, and many other media outlets for his work with CreditCardForum.

Have you had any bad experience with unexpected debt? Share your thoughts in the comments section.