The Basics on Financing Your Own Business

Posted by: Rod Kurtz on November 4, 2009

With the unemployment rate hovering near double digits, a growing number of people are viewing job loss as that "karmic kick in the pants" to try something new. In fact, according to the Kauffman Foundation, 7% of those who have recently lost jobs are launching new ventures (compared to 0.3% of the general population). If you’re considering striking out on your own, here’s some advice:

1. It’s okay to use your severance. There will be major start up costs and this can be a good way to use those dollars. But definitely do not cash out your 401(k). Instead roll it over into an IRA so that if you need cash, you can make incremental withdrawals (paying tax and a 10% penalty) as needed.

2. Start with savings. Aim to have at least three years’ worth of living expenses—over and above the startup costs—before you go into business for yourself. Five years is even better.

3. Check yourself. You can get a free copy of data from all three credit reporting agencies at www.annualcreditreport.com. (You’re allowed one free report from each agency per year.) Keep in mind that mistakes can take months to correct and until they’re fixed, they can hamper your ability to get a loan or business credit card. You’ll also want to see your credit score, which you can get at MyFico.com for $15.95.

4. Shop for low-cost loans. SBA loans are very attractive if you can get one; current rates are in the 5% to 10% range, depending upon the loan term and how much you borrow. You’ll need decent credit, a detailed business plan, and at least some collateral to qualify. SBA loans come in all sizes, but unless you’re launching a big venture, the SBA’s "microlending" program is probably what you want: These are loans for up to $35,000 (average is $13,000). Call your local SBA office or go to www.sba.gov for details.

Bottom line: You need to be brave—but smart—in this new economy. Remember that some of the most successful American companies got their start during recessions.

Beth Kobliner
Author
Get a Financial Life: Personal Finance in Your Twenties and Thirties

Reader Comments

Tom Gazaway

November 6, 2009 6:01 AM

3 to 5 years of living expenses over and above the start-up costs of the business? Wouldn't that be nice. I wonder how many small business owners you have actually worked with because if that's the criteriz then not only would VERY few people ever start a business but we wouldn't have many of our thriving small businesses that are the key to our economy. I work with small business owners everyday - it's all I do - and our company helps them to raise small amounts of capital and to do it in a way that will maintain their good credit. With that being said, small business owners rarely have the kind of reserves you're talking about and I don't think anyone should wait until they have that kind of money saved up before they start pursuing their dreams and doing what they are passionate about doing. Of course there needs to be a plan and you never do anything on a whim but nowadays you can start small, work from home, be creative, and really build something special without needing lots of savings. Having good credit and knowing how to build your business so that both the personal and busienss credit are great is VERY important - esp. if you don't have lots of money saved up.

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