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 Before
Going Into Business...Do You Have Reserves?
by Gerry
Schmich
So, you have a great idea for
a service, product or business. Now all you need to do is get
some startup capital and begin setting up the new enterprise.
You decide that all you need is $25,000. for startup expenses
and then your business will begin to get off the ground and pay
for itself.
But what about living expenses? You reason that the cash flow
from profits in your new business will provide enough for you to
live on and pay off the $25K.
What are the chances of this happening within the first year of
business?
Slim. Or None!
Based on my experience with small business owners, I think
people need to save up 2 to 3 years of living expenses as a
reserve before starting up a business.
Why?
Because according to U.S. Census Bureau statistics (2003) only
66% of new businesses survive 2 years! And only 40% will last 6
years.
In the meantime you may find yourself subsidizing your business
and personal life by using Home Equity loans or lines of credit,
using credit cards for living expenses, family handouts and
eating Ramen noodles (as one coaching client recently informed
me that she was doing).
All of these methods and more are creatively used by many new
business owners to survive as they eventually go under through
the crash and burn death spiral of increasing debt feeding ever
higher interest rates...further increasing the amount of debt!!!
It never ends until there is bankruptcy! With the new bankruptcy
laws it may not end there as you may be forced to take chapter
13 and pay off credit card debt.
Look—here’s the deal. Starting a business is tough. There are
unforeseen expenses that the best of business plans will miss.
You need to give yourself a fighting chance of making your
business work by removing the future stress of a limited income.
You can do this by saving 2 years or 3 years of living expenses
in an interest bearing account.
Then refrain from taking on a second mortgage, or a line of
credit against your home. Also limit your use of the credit card
which is nothing more than making a high interest loan to
yourself! Talk about shooting yourself in the foot?!
The choice is yours. As Dr. Laura says,"Now go do the right
thing."
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