The average cost to start a microbusiness sits at approximately $3,000, while many traditional businesses require about $30,000 at the beginning. One of the biggest hurdles for all new entrepreneurs is obtaining the necessary funding to start and grow their business.
Personal Finance Can Affect Business Goal
Because these individuals do not yet have the ability to report their earnings and losses, one of the biggest factors in the success of a new business is the owner’s personal finances. Explore the specific ways in which your personal finances can affect your goal of starting a business.
1] Your personal finances determine how much funding you can receive
For most entrepreneurs, the ability to quality for business funding and loans is an absolute necessity. While some have private investors or the necessary cash to launch, almost all new business owners apply for some kind of credit or loan option. If your business has been open for 6 months or less, it is extremely difficult to obtain a business loan.
Therefore, applying for a business credit card or a personal loan are the best choices. In both cases, your personal finances will be assessed for creditworthiness. Two major factors that lenders look at is your credit score and your income.
To get the best interest rates, experts recommend having a credit score of at least 640. Additionally, you can report all income that you personally earn from your job, your current business activity, and income from other sources.
For example, if you are earning $40,000/year from your job, $25,000/year from side projects, and $18,000/year from passive income sources, you can report $83,000 as your total income.
2] Having a bigger savings account can help you launch your business sooner
One recent survey found that the majority of entrepreneurs (64%) started their business with less than $10,000 in the bank. The same survey found that many others started their businesses with $5,000 or less saved. Considering the costs of starting almost any type of business, these amounts are exceptionally low.
As one might imagine, the less cash you’ve saved to launch your business, the more external funding you’ll need. If there are issues with obtaining the extra cash needed, you may have to delay the opening of your business.
Having a bigger savings account, on the other hand, can help you launch your company sooner. Therefore, if $20,000 is needed, set a goal to save $25,000. Plan to meet and exceed the funds needed to be more in control of when you open for business.
3] Personal debt also has a big impact
Personal debt can impact your ability to start a business in multiple ways. Not only does it take away cash that you could be saving toward your expenses, but your debt-to-income ratio affects your credit score. How is this ratio determined?
The Consumer Financial Protection Bureau states that “if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000.
($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.).” To get the best rates on credit cards and loans, and to avoid denial of your application, it is recommended that you keep your debt-to-income ratio at 43% or better.
Prior to launching your new business, it is best to get your personal finances in top shape. You can achieve this by paying down/off existing loans and credit cards, building your savings account to meet your financial goals, and by boosting your income as much as possible.