(Hopefully folks will not confuse this post with Suze Orman's 'Can I Afford It?' segment on her weekly show. Which I watch every week, btw!)
When my new book came out and I set up this blog, I polled some friends for ideas on what topics I should write about. One of them mentioned "start-up cost fears" as in: "Most people are afraid to start a business because how much it costs to start one (real or perceived). Maybe some suggestions on how to obtain financial support would ease the fear."
Oy vey. Having lived this, and having dealt with the financial aftermath of a business that didn't pan out financially, I do have a lot to say on these topic(s) and will likely delve into many details in a whole suite of blog posts.
But before I can tackle details on start-up finances/financing, we gotta talk about something more fundamental: Can You Afford It? Can you afford to start your own business? And what does that question mean, anyway?
It means several things:
1) If the business requires you to reduce your income, and you can do that, then you can afford it
2) If the business requires you to draw NO salary for a period of time, and you can do that, then you can afford it
3) You have no extraneous credit card or other debt
4) You have the ability to finance the business for some start-up period of time
Number one and number two MUST, MUST, MUST be true. In order to live, you're likely paying rent or mortgage (maybe you're lucky enough to not to have one of these expenses, but I'm going to assume that the majority reading this do) which means that you need a way of paying those expenses month after month. Ideally, you have a chunk of money in a savings account... at least a years worth of living expenses... because you can't guarantee that your new business will provide you with an income anytime soon.
Some folks, especially those really anxious to start their business will argue with me about #3. Yes, technically, if you have a bunch of consumer debt, you CAN start a business, but you might be making your life more difficult than it needs to be, because it means you NEED even more of an income to cover that debt. It also might make getting credit for your business more difficult... more on that in a future post.
When I started The Pot & Bead, my retail store, the plan was for me to draw a salary as the owner/manager that was only 60% of what I was making at the time as an engineer. At the time, it was enough to cover my personal bills (my part of the mortgage, student loan payment, etc etc). However, about a year into the business, sales started to taper off and I couldn't draw a salary anymore. At the time, I was married, and my eventually ex-husband was able to cover the expenses at home. But when we wanted to get divorced, I had to support myself and couldn't with the business. That's one of the two primary reasons I went back to my engineering career.
All of my regrets related to the business, and in my personal life, are financial. They tie together because not having all my personal financial ducks in a row put a lot of limitations on my freedom and what I could do with the business. In other words, I had a lot of debt personally, so I needed to draw a certain salary. When I couldn't draw that salary anymore, I had to go back to my engineering career. (Luckily, the engineering career has been good to me since... but that's also another blog post or ten.)
Here are some things that I WOULD DO and WOULD NOT DO related to businesses and finances if I had to do it all over again:
- WOULD: seek financing from friends and relatives (if something goes wrong and you need to modify your repayment plan, friends and relatives are easier to work with than a bank)
- WOULD NOT: defer student loans (interest still accrues when student loans are deferred, so I wound up paying more for my education than I ever planned)
- WOULD NOT: take out a 401k loan (I think 401k companies should be required to counsel individuals on the financial repercussions of this decision before they're allowed to take a loan)
- WOULD: avoid credit card debt like the plague (isn't this obvious?)
It's never to early to think about your financial situation if you are thinking about starting a new business. Even if you don't know any details about that business, work on getting your personal finances under control. It'll be all the more easier to go out on your own later.