Are Your Personal Finances Good Enough to Start a Business?
Many people are interested in starting a business. They want both independence from upper management and financial independence. But you need money to start a business, and if you aren’t in good financial shape, you’ll have a difficult time getting off the ground.
Does this mean you need perfect credit, zero debt, and mounds of savings and investments? Should you pay off debt or save before you start a business? Not necessarily. Many Americans with debt and less-than-perfect credit scores hurdle financial obstacles in pursuit of a business.
Others find themselves so overwhelmed by their financials that they can’t get off the ground. It’s important to have a good foundation so you can start your own business, but financial perfection is not a requirement.
Here’s what you need to know about starting a business with your current finances.
Maintain a Manageable Debt Load
Most Americans are in debt. In fact, research from December 2017 shows that the total debt load for American consumers was $13.15 trillion. Being in debt doesn’t have to stop you from starting a business, as long as it’s at a manageable level.
There’s a difference between good and bad debt. Good debt involves loans such as your house, a modest car, and manageable student debt. As long as you make regular payments on these loans, you’ll establish a good credit score that will help you get a business loan.
Bad debt involves high-interest student loans that are difficult to pay, high credit card balances, or other debts on which you frequently miss payments. These loans will tarnish your credit score and make it difficult to stay on track to build your business.
Before starting a business, focus on maintaining good debt and minimizing the bad. Your credit score will improve over time, and you’ll gain more financial confidence.
Build Your Savings
While good financing will save you from paying for your entire startup out of pocket, having savings is an important financial step before starting a business. Not only does it provide collateral backing when you apply for a loan, but it will also save you in a pinch when cash flow is low.
Many startup owners don’t take a paycheck for several months or even years after a business starts. They invest every cent made in the business. Your personal savings will allow you to cover your personal obligations while working full-time in your business until you can pay for yourself.
If you haven’t built a substantial savings account, it might be worthwhile to hold off on the more expensive aspects of your startup for a few months while you work at it. Keep your day job and put every spare penny into savings.
Have a Good Financial Plan
Successful businesses begin with a clearly written business plan, detailing your plan for spending and making a profit. Pay special attention to the financial portion to determine how much money you’ll need and if starting this business will be feasible in your current financial state.
This plan will not only tell you whether or not you’re ready to get started, but it will also provide guidelines for obtaining funding. It’s an important step to help you think through the financial aspect before jumping in head first.
Obtain Strong Business Funding
Fortunately for today’s entrepreneurs, it’s not nearly as difficult as it once was to obtain funding. There are dozens of options for financing your business depending on your credit score and financial situation. Here are some of the most common:
Traditional bank financing
Peer to peer lending
Using a credit card
Credit cards or personal loans
Startups have pulled from these options for years with varying levels of success. Discuss your options with a lender or financial consultant.
Put Your Personal Finances in Order
Building savings, obtaining bank loans, and avoiding excessive debt are vital steps to starting a business, but you’ll still struggle if you don’t have a strong personal financial background. Taking care of your personal finances will help you hone the skills necessary to run a successful business as well as minimize your risk during the early years.
To help build your emergency fund and pay off debt, develop a sense of frugality and eliminate bad spending habits. Try to avoid credit cards and only go into good debt for the sake of your business. You may not be wealthy from the start, but you’ll have an easier time starting out if your financial house is in order.
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