How to Consider Your Financial Situation Before Starting a Business?
One of the most glaring problems that you’ll often see with potential business owners is their failure to plan properly for the financial transition from employee to business owner. Cash flow problems can lead to unpaid bills, continuous calls from debtors, and emotional stress.
Consider your personal financial situation. If you plan to quit your current job and devote all of your energies to your new business, it is a great idea to set aside enough money to pay your living expenses for at least six months. If you have a spouse or other family members that work, can you live on their earnings?
New businesses frequently are not very profitable in the early stages. Prior planning can provide you with a much-needed cushion in case you cannot take any money out of your business for a period of time.
Think about start-up costs. If you are starting a new business from scratch, do you have the money you have to spend in order to get the business up and running? Think about whether you will have to rent an office, buy furniture, buy equipment, advertise, pay for permits, hire a lawyer, or number of other initial things that require spending money before you make money. Fitness centers and restaurants are examples of businesses that are required to expend significant amounts of money before they open their doors.
Look realistically at initial sales potential of the business. The opportunities for initial earnings vary greatly from business to business. For instance many service companies can be profitable from the very beginning. If you open a consulting business and have your office in your home, your earnings are limited only by your ability to attract and service clients. Likewise, a landscape or yard maintenance business can earn early profits if it has the right equipment, skilled labor, and customers. On the other hand, most product businesses, cannot earn income until the products are developed or purchased, advertised, and sold.
If you need a funding, be aware of lender requirements. Get rid of the idea that business capital is easy to get. It is a common misconception that the U.S. Small Business Administration (SBA) and other government entities are waiting in the wings to dish out free money to entrepreneurs with great ideas. Nothing could be further from the truth. What is commonly referred to as an “SBA Loan” is really a loan from a traditional lending institution (bank), but guaranteed up to a certain percentage by the SBA to reduce the bank’s risk factor.
In addition to asking for a solid business plan, the bank will require that you have a high credit rating (FICO score), cash to invest in the business, and personal assets (equity) that can be captured in case you default on the loan.
