Rules For an Entrepreneur’s Wallet
The first step in starting any new business is to raise money. Yet, acquiring startup capital can be risky if not done correctly. Many entrepreneurs find themselves in personal financial trouble after investing too much into their business without a safety net. Before you tie up all of your personal finances into your startup, learn and understand your options, such as business loans, investment capital and credit lines.
Separating Your Finances
Investing personal income into your new company should be one of the last options to consider. In fact, you should do as much as possible to keep your personal finances separate from your business. To do this, many startups look to secure bank financing or a credit line. Granted, it can be difficult for new businesses with little or no revenue stream to secure a loan from a bank.
However, there are other options for new entrepreneurs to build credit and secure the financing they need before going to the bank. Crowd funding and venture capitalists are more likely to back projects that are less quantifiable and financially sound. The trade-off, however, means you often lose a partial stake in your company to investors.
Reduce Your Existing Debt
In building for the future, it’s best to first take care of the past. Repaying old debts, both personal and business, can help improve your credit and increase your loan potential. As your new business stabilizes, better credit can help secure loans down the road, when you’re ready to grow.
Additionally, entrepreneurs should avoid taking on new debt when there are already outstanding debts. Startups rarely see profits for the first few years; that time increases with the debt you accumulate.
Do Your Research
In any business endeavor, it’s critical to understand the risks and term agreements of every financial transaction you make. Whether you take out a loan or involved in a venture capital partnership, you should know what you’re financially responsible for. If your business fails in the first few years, you’ll still be responsible for paying back loans and investors.
Finally, always have a backup plan. Entrepreneurs are, by definition, risk takers; nevertheless, they need to be prepared for when plans fall through. Avoiding personal debt in your business venture can reduce the risk to your financial wellbeing in the event of a failed business. At the end of the day, you need to know your options and understand the risks involved. The reward is often worth the risk, but only if done carefully.