Before you can commit to funding your new business, you need to take care of your own personal financial goals. You need to move into starting a business with a strong financial record, as well as money in the bank. This makes it easy for you to qualify for a small business loan, if you need one down the road, and keeps you from stressing over not having the funds to cover your expenses while you’re waiting to turn a profit.
1. Eliminate Personal Debt
Don’t start your business weighted under credit card debt. The average American household has about $15,000 in credit card debt, a staggering number if you want to bootstrap your own business.
Having zero debt frees up your credit capacity, so work on zeroing out credit card balances and paying off your car so that you can focus only on basic expenses such as your mortgage, phone, gas and electric, cable, and food. The leaner you run, the more you’ll have to put into your business.
2. Improve Your Credit Score
There will come a time in the all-too-near future when you need credit, be it in the form of a store credit or just credit from vendors you work with regularly. If your credit score isn’t good — say, under 750 — you might not get that credit or pay a much higher interest rate. Since your business will have no credit history to begin with, they’ll look at your personal credit score, so you need to focus on cleaning up your number if it’s less than ideal.
Don’t know your credit score? You’re entitled to one free credit report a year from one of the big three indexes. Get your copy here and start your plan to improving your score.
3. Set Aside 12-24 Months of Household Expenses
You will not make a profit instantly, so you’ll need to keep paying those household expenses in the meantime (another reason to lower your debt: you’ll have less to pay in expenses!). Having 12-24 months’ worth of money to cover expenses may sound drastic, but it’s better to have more than enough than to find yourself unable to pay bills in 6 months.
If you don’t currently operate with a budget for your household, now’s the time to create one. If, in the process, you find places you can reduce your expenses, such as cutting the cable cord, go for it.
Remember: if you’re quitting a job with health benefits, you’ll also need to factor in the cost for your health insurance. It will be significantly higher than your employer-sponsored plan.
4. Have Your First Year of Working Capital
In addition to your personal expenses, you’ll need to be able to cover your business costs until your business gets going. A year’s worth of capital should be sufficient. Again, start with a budget (even if you’re using guesstimates at this point) so you know what expenses you need to plan for.
Since you’ll have a pretty sizeable chunk of money in savings for your personal and business needs, consider opening a money market account or high-yield savings account so that you can earn a little interest while it’s sitting there.
If you get your money straight before starting your business, that will be one less things stressing you as you start your small business.