Starting your own business can have a severely negative effect on your credit rating. For many new business owners and self-employed people this is a source of frustration. You will have to personally sign for most of your business debt, sometimes even vendor credit! This alone is frustrating enough, but to have it affect your personal ability to borrow is a slap in the face. Many lenders do not want to lend to anyone who is in business for less than three to five years. This is because of the high failure rate of businesses (over 80% fail in the first five years).
Plan Ahead
All is not bleak, however. You should be aware ahead of time that you are interested in starting your own business. Usually several months. Therefore, a good strategy is to set up your expected personal credit needs, such as credit lines, mortgages, lines-of-credit, etc. before you leave your stable job. Then, make sure you have a good business plan in place. Your business advisor/coach or accountant can help you with this.
Many businesses start on a part-time basis. If this is viable for you, then do this, since you will continue to have your paycheque while working on your business. Once the business starts to show that it can make money, then you can quit your job!
There are, however, many businesses that start out as full-time ventures. In this case, setting up your personal credit is very important to do before the business starts, if possible. If you have a good personal credit rating before you start, this will certainly help in obtaining credit for your business! Once the business starts, it can take over three years before you will even qualify for a personal credit card.
How & When to Draw from the Company
If you do start the business full-time, and are desperate for some money for personal reasons, you can always draw from the business, so long as it does not hurt the business’ cash flow. You really don’t want to injure the business and its growth in any way, since this is now your source of income. It is important that you are able to maintain the business cash-flow as well as live. Proper business planning and the rigth amount of initial or staged credit can help in this. Remember that financing for a business is often done in stages, and as you grow, you will need more money. Talk to your business consultant or accountant to find out the best way to structure your management pay and how to set up business loans.
Johanus Haidner - Johanus Haidner (BA, BEd, MBA) is a martial artist, writer, craftsman, artist and life coach in Edmonton, Alberta.
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