How Can You Keep Your Finances Safe While Opting for a Personal Loan to Fund Your Business?
Money attracts money, and all businesses need capital to grow and prosper. Even an out-of-home soap making and selling business requires a necessary minimum fund. This money goes into buying raw materials, buying or hiring equipment, hiring talent, paying for distribution, marketing costs, and branding. Even a business, running on bare minimum infrastructure, needs a computer and a small workspace. These are the most basic requirements of any business in the 21st century.
How much can a new business cost?
Several types of businesses exist, and as a result, there can be a whole range of investments that entrepreneurs require. The average cost of establishing a company can be around $30,000, provided it falls under the category of MSME or home-based proprietorship. Franchises are great money savers too. However, if you are hoping to establish your own brand with a dedicated online market and a wide range of products, you may need a more sizeable fund. Many factors play critical roles in determining the cost of each business. It may take some companies a long time, sometimes months on end, just to break even. Some entrepreneurs fail to account for rising business expenses and their breakeven point keeps moving further away from them each day.
What funding options can you avail to start your new business?
There are several financing options that you may consider, but you should always try SBA loans first. These are hard to come by since almost all MSMEs are vying for them. These are super competitive, and you may even find yourself high and dry after months of toiling around the offices of US Small Business Association. Several entrepreneurs opt for equity loans, but the high cost associated with them can be a significant downside. Also, venture capital platforms and angel funding options are very much viable for all kinds of businesses, but you need to consider the pros and cons of each before opting for one.
The other viable option that many business owners ignore is to go into personal debt. Using individual credit cards and unsecured personal loans to build your legacy is, of course, an option. However, you must follow these five rules that can keep you out of trouble.
Pay off all outstanding debts
Do you already have home loans, auto loans, education loans or medical loans on your personal line of credit? If yes, taking out a fresh loan on top of the pre-existing loans can be a bad idea. It is because businesses take time to break even. It might be quite a few months before you turn a profit, and this can leave you under a mountain of compounded debt.
Too many outstanding debts can lead to missed payment deadlines, and you can end up with a sickly credit score. It makes it quite difficult to qualify for attractive loan offers in the future. The healthier you keep your credit score now, the better offers you can access in the future. All experts will recommend you to pay off the existing debts before you open up new lines of credit for your business.
Personal loans increase your liability
When you are opting for a personal loan to fulfill your business requirement, you make yourself liable for repayment. Therefore, in the event of a fiasco, you will surely owe the money to the creditor. That is why you should always carry out research and analysis to find out the chances of your company's success. Moreover, you need to know what kind of backup plans you and your family have in the event of a failure. Declaring bankruptcy may seem like a great idea when such a time arrives, but even that comes with its restrictions including cancellation of credit cards, seizing of assets and survival of some personal debts that you need to repay after you declare bankruptcy.
Just because you get the first personal loan you were looking at, does not mean you should take it. There are hundreds of such loan options for every business owner. Personal loans, just like other forms of business lines of credit, have several variants. You can always compare them based on their interest rates, APRs, repayment period and the maximum loan amounts. You should obviously go for the ones with the lowest interest rates. It can automatically mean avoiding personal credit cards, at times. Although several credit card options allow no-charge balance transfer and 0% APRfor the first couple of months, you should only pick one after you understand all the payment terms and conditions.
Consider developing a backup plan
We all know that businesses are risky, but we often forget that while taking out new loans. We choose to look at only the chances of success and ignore the risk factors. However, that just makes situations worse by not preparing us for a possible calamity. Comprehending the risks of particular new investment or a new business decision can help you plan for a time of crisis.
All successful business owners have backup plans. Bankruptcy is NOT backup, and neither is debt management. A good backup plan can include your old career option, a new but small home-run business or living life frugally while relying on home talent for running the household. Stories of people accumulating business debt and going back to live a life of simplicity till the next significant opportunity hits are very common all over the world. There are several companies including General Motors, Kodak and Marvel Entertainment that have bounced back after a bad run with finance and profits.
Do not go for a personal loan just because your contemporaries are doing so. Personal loans can be your savior in a dire business situation, but they are not your only option. Even though venture debts, equity debts, Crowdfunding, SBA loans and business credit cards seem out of your reach, you should explore their terms, pros, and cons before you go ahead and decide on your personal loan of choice.