5 Financial Decisions before Business Start-up

You see it every time the economy is stumbling, more people seeking advice about starting there own business than during times the economy is doing well. It may seems strange, but if you think about it for a few minutes, you will see why this is so.

In an economic downturn a lot of people are laid off — or just the possibility of losing a job — often causes people to focus on how they might start their own business. This focus is not that strange, because people can’t find new jobs, thus they think we have to do something for ourselves to make an income.

But people have to remember start starting a business brings a financial risk. Of course there are ways you can minimize this risk, for instance by planning everything in detail. This is why we talk today about the financial decisions people have to make before business start-up. Below you’ll find the five biggest financial decisions someone has to make before starting their own business:

1. Enough Savings to Live From?

Starting a business costs money and not every business owner can raise enough money to pay themselves a salary from day one. But the bills got to be payed; this is why you should have enough savings to live from for at least six months. If you haven’t this kind of money on the bank than you should really think about postponing the business start-up. The number of bills will more likely to increase when starting a business than decrease. Postponing can give you time to save some additional money or time to search for funding. Postponing doesn’t mean that you can’t work on for example business plans, business systems or process maps.

2. Willing to go into Debt?

Business loans can fund business expansion and improve the overall profit ratio. However, business debt is often personal debt for most small business owners. Many people fund a business start-up by lending money to their business or by deferring any salary payments for their own labour. Many small business owners will tell you that lenders are willing to lend you money, but these lenders often require that you personally guarantee the loan. If the business is going sour, you are personally in debt! So think about how deeply you are willing to go into debt before you start your enterprise.

3. Health Insurance

In many countries there is no guarantee of health coverage for everyone. Or there is a national health system, but business owners are excluded. Whatever the system is in your country, you should really think about how you will fund the health insurance for you as a business owner and for any employee you may hire. Remember without you there is no business start-up, thus no income. So you need health insurance to pay for potential medical bills! Find out what the policies are in your own country or ask a specialist for advice!

4. Lines of Credit

Banks or other lenders are more willing to lend money to people that have a job with a steady paycheck than to people that are self-employed. You can probably get a home equity or other secured loan with a minimal amount of paperwork if you have an excellent credit rating. (Check your credit rating before asking for a loan. Try to improve the credit rating if is not that good.)  Once you’re self-employed, you’ll probably have to provide at least the most recent tax return and other documentation before getting approval.

5. Disability Insurance

In most countries people get disability insurance through their employer. But as a future business owner you need to make sure that you are covered against not being able to run the business.

Note: in most cases it is not possible (unlike health insurance) to transfer disability insurance from an employer insurance to an individual insurance. Make sure that you protect yourself (and your family.)

Try to get your own disability policy while you still have a job, thus before you leave to start your own business. Once you have the policy established and are paying the premiums, you should be able to keep the policy when you go out on your own.

As with other financial matters, insurances are a difficult and sometimes tricky field, so make sure to check with your insurance agent to make sure that any policy will remain in force after you leave a job. Talk your plans through with your insurance agent; they can give you valuable advice.

Additional Tips

If you are not very good at financial matters then you should take a financial course before thinking about starting a business.

Whether you are good in financial matters or you’ve still need to take financial course, it’s always wise to talk every financial business decision through with a CPA or other financial specialist, before you make the final decision. They can help you to keep the business on track!

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