Starting a small business is definitely not a cakewalk! And making sure your business begins with the right foundation is essential to enjoying prosperity and success for years to come. While there are plenty of components that must be carefully considered, your first thought should be granted to your financials.
Many people aspire to own their own small businesses due to the perks. You get to be your own boss, set your own hours, and manage the growth of your venture as you see fit. However, you’re also on the hook if your company absolves into financial destitution. To safeguard your investment, make sure you have reached these three financial checkpoints before starting a small business:
A Healthy Personal Credit Score
Like most things, a good bill of health will help most areas of your life. Your financials are no different! Having a healthy credit score will determine whether or not certain opportunities for funding your small business will be available to you. If you’re looking for alternative solutions for financing your small business, take a look at the following options below:
- Home Equity Loan: A home equity loan (HEL) is a great option to think about if you need some extra dough and you own a home. Using a HEL, you can build equity and borrow against it, providing a lump sum of cash to use however you see fit. The common misconception with HELs is that they can only be used for home improvement projects. But, borrowers have reported using the money to fund anything ranging from student loan payments to padding their retirement accounts. Something to keep in mind, though, is that you must have at least 15% equity in your home and a minimum credit score of 620.
- SBA Loan: SBA loans are guaranteed by the Small Business Administration and can only be used for business purposes. There are also certain requirements your business needs to meet as a borrower. Your business must be independently owned and operated, must not be dominant in its field, and shall meet specific employment and sales standards set forth by the agency. Additionally, you need to have a credit score ranging from 620-640 for most SBA loans.
- Personal Loan: A personal loan is another lending choice available to you as an entrepreneur. With personal loans, there are often less strenuous demands when you apply. For these loans, most lenders require a minimum credit score of 580, and no collateral is required if you default. There are also trade-offs for this option. Personal loans tend to have higher interest rates to start and the amount of money you can borrow is typically much less than other ways of financing.
Not only that, but setting the precedent of being financially responsible will turn out to be beneficial when it comes to your business activity as well. As you grow, your business credit score will begin to compile, which increases or decreases your chance of being approved for future financial opportunities.
Similar to your personal score, a business credit score is composed of four major factors: payment history, credit utilization, business size and credit mix. By keeping these details in check, you’re more likely to seize a chance at business development later on down the line.
An Ample Amount Of Savings
No matter how you decide to finance your small business venture, making sure you have enough in the bank before starting is key to ending with a favorable outcome. Even after financing, you should have a lot of stake in your small business’s success. Considering 22.5% of small businesses fail within the first year, the amount you have supplied in terms of your own money should be abundant enough and come from your own personal savings so you can start building up ownership.
Save up for startup costs like filing legal documents, hiring lawyers, equipment expenses, retail or office space fees, paying down debt, and even advertising so you can have as much visibility within the community as possible. Additionally, just in case something goes wrong, having an ample amount of savings to cushion any losses is vital to generating cash flow. Overestimate your costs so when you assess your bottom line at the end of each quarter, you have already anticipated diminishing returns and planned ahead for financing them.
A Comprehensive Business Plan
At the end of the day, there should be a method to all the madness you may experience when starting up your small business, especially when it comes to finances. By using a comprehensive business plan, you can assess several factors that may affect your business in the long run. Some things to cover in a financial business plan are market opportunities, a competitive analysis, sales/marketing strategies, and an evaluation of your financial performance.
At the end of the day, you should have a clear indication of your bottom line and how that will lead to either your failure or success as a small business owner. When it comes to your finances, becoming an entrepreneur is more than budgeting or being smart with money. Beyond that, you need to learn how to properly allocate your resources based on the clear results you experience with each passing quarter. By being meticulously organized so you can adjust to any situation, you too can achieve the dream of being a small business owner!