It’s not easy to be an entrepreneur as there are so many challenges you have to face. The biggest challenge is to arrange money for setting up your business. Even if you’re a small entrepreneur, you have to arrange at least $30,000 for running your business. Unless you’re an extremely wealthy person or an experienced entrepreneur or a great saver, it’s impossible to arrange the money without taking out a loan.
Few questions must be roaming in your mind such as:
(i) Do I need $30,000 for setting up a business?
(ii) How can I get $30,000 for running a business?
Do I need $30,000 for setting up a business?
This is the average amount that one needs to set up a business. There are loads of business expenses that you have to bear as a business owner. For example, buying raw materials, registering the business name, developing a website, renting a workspace, and so on. Moreover, your business expenses can be more than your revenue in the first few months. You need money to survive those months.
How can I get $30,000 for running a business?
This is a pertinent question. Who will give you such a big amount of money? Venture capitalists and angel investors can give you this money. But, they would want something in turn. For instance, they would want to be major shareholders in your company. You won’t have the sole control of your business.
The other option is to take out a business loan. However, banks and credit unions won’t give you a business loan unless you have a very good credit score. That is for sure. Moreover, they will evaluate the profit potentiality of your business plan. If they feel that your business idea is useless or won’t click in the market, then you won’t get a loan.
The third option is to take out a personal loan for setting up your business. If you have a good credit score, then you can qualify for a personal loan. This is not a bad option since you’ll be the sole owner of your business. You’ll have the power to make all the major and minor decisions for your business. No one else can say anything. However, in this case, you have to follow a few rules as explained in the next section of the article.
4 Rules you must follow before getting into personal debt
As an entrepreneur, here are a few rules you should follow when getting into personal debt.
1. Pay off your debts and improve your credit score:
Do you already have debts in your hands? If so, then consult debt counselors and find out the ways for leading a debt-free life before taking out a personal loan. It’s a bad idea to incur fresh debts when you’re already swimming in a pool of debt.
Your business won’t reap profits in the initial years. In the first few months, your business may run in utter loss. In the next few months, your business may get into the no loss no profit zone. The compounding interests of your existing debts might leave you with a bigger amount than what you originally owed.
Moreover, a huge debt amount can hurt your credit score, which will have a bad impact on your loan eligibility. You may not qualify for a personal loan at a low-interest rate. This means you have to pay a big amount of money on the interest.
For your benefit, you should pay off your existing debts before taking out a personal loan, or your creditors may file a debt collection lawsuit against you in the future.
2. Be patient and shop around for the best deal:
There is no hurry. Be patient and shop around for the best deal in the town. Call different lenders and ask them what they are willing to offer you. How much interest rate will they charge on the loan? How much can you get from them? What will be the tenure of your loan?
Get the quotes and then decide who is giving you the best deal. Your goal is to fetch a loan with a low-interest rate. That’s all.
3. Be rational and understand the consequences:
Personal loans are not free money. You have to pay them off even when your business fails. You’re personally responsible for the money no matter what happens. This is why it’s important to have a rational view of your business plan.
If your business plan is your brainchild, then you might not be able to look at it objectively. You can be emotionally attached to the idea. This is why you can show your plan to a trust-worthy friend who has good business acumen. He can give you an honest opinion.
4. Look at other options for arranging the business capital:
Apart from personal loans, there are a few other options you can explore. For instance, you can take out a secured loan if your credit score is very bad. A secured loan carries a lower interest rate than an unsecured loan. However, remember one fact. You’ll lose the collateral if you fail to pay off the loan within the deadline.
You can also use business credit cards for setting up your business. Check out how much you have to pay on the interest rate. If the interest rate is lower than the personal loan, then you can go for business credit cards. Crowdfunding is also another viable option for you. Understand its pros and cons before making a decision.
Government-backed small business loans carry low-interest rates. So, you should always try this option first. If you fail to qualify for a small business loan or find investors, then only you should consider taking out a personal loan.
Finally, have a plan B in case your business fails. Only 50% of the businesses complete 5 years in the industry. And, this is a fact. Many of these businesses are run by experienced entrepreneurs. Still, they fail to run a business for a long time.
How will you pay off the personal debt if your business fails? Think about this seriously. There are a couple of options to pay off personal loans. For instance, debt consolidation and debt settlement. Know how these debt relief programs work before you take the next step.