Minimize the Financial Risks of Starting a Business

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Startup rates are rising. Americans, generations apart, are eager to start their own businesses. Entrepreneurial ideas abound. Of course it’s risky to start a business, whether the economy is good or bad. Are you thinking about starting a business, but are too scared to do so because of the risks involved?

I’m not going to tell you it’s not risky to start a business. It is. You risk time, energy and of course, money. The good news is, there are plenty of ways to minimize the risk to your bank account. And it’s crucial you do so, since being underfinanced is one of the top reasons for business failure.

If you want to succeed, it’s so important to start with adequate capital to achieve your goals and protect your personal finances. Follow these steps:

Figure out your startup costs. Depending on the type of business you are planning to open, these will vary. However, they typically include rent and utilities for your office or retail space, the cost of any initial licenses or permits needed, the equipment for your store or office, inventory or materials and more. You will also need to budget for marketing and sales, as well as the cost of professional services such as a lawyer and accountant. Last, but not least, figure in salaries and taxes for employees as well as the cost of supporting yourself until the business breaks even, which typically takes six to 18 months. The more detailed you are in estimating your startup costs, the better. SCORE has a useful Start-Up Expenses template that can help.

Once you know how much money you will need to start your business, the next step is figuring out where to get it. Begin by doing an inventory of your own financial assets. In today’s tough economy, the ideal situation is to fund your business yourself—and even if you do apply for bank loans or seek investors, lenders and investors will want to see that you’re willing to put your own money on the line before they put up their own.

When assessing your assets, consider your bank accounts, retirement accounts such as 401(k) plans or IRAs, cash-value life insurance policies and real estate. Also consider your debts, which include mortgages, car payments, credit card balances and the like. Subtract your debts from your assets to come up with your net worth. A higher net worth increases your chances of finding financing from a lender or investor.

If you have enough assets, you can either use them as collateral for a bank loan or consider selling them to raise enough capital to start the business on your own without outside financing. However, using assets as collateral can give you more flexibility if you’re able to get more from a loan than you would from selling them outright. By holding onto the assets, you can use them as collateral for other loans in the future as your business grows. The decision really comes down to whether you are comfortable with taking a loan or whether you prefer to be completely bootstrapped (self-financed).

Of course, many startup entrepreneurs don’t have enough assets to sell and raise capital. If that sounds like you, it’s time to look at other financing options. Your own friends and family can be a good source of capital. You can tap into people you know to either lend you money or invest money in return for a share of ownership in the business. Even if your friends and family members can’t afford to help you, they may know people who can. If you decide a bank loan is the way you want to go, you can get guidance from SmallBusinessLoans.com to find the type and size of loan you need.

Wherever you decide to get your startup financing—from your own personal assets, your friends and family, a bank loan or outside investors—you will need to create a business plan. A business plan will be required by anyone you ask for money as a basic part of their decision-making process. But beyond its use to lenders, a business plan helps you protect your financial assets.

How? Writing a business plan requires you to think through every step of starting your business, including who you will target as your market and how you will sell your product or service. As you create your plan, details you hadn’t thought about will come to mind and you’ll need to assess how much they will cost to carry out. When your business plan is complete, you will have a “road map” that shows you how long your startup journey will take, what steps are involved and—most importantly—how much it will cost and how much money you can expect to make. Knowing what you’re in for before you start out will ensure that you don’t run out of money halfway through the process—and that your personal finances stay intact.

Rieva Lesonsky is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Follow Rieva at Twitter.com/Rieva and visit her blog at SmallBizDaily.com. Visit her website SmallBizTrendCast to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.