A common mistake many entrepreneurs make when starting a business is thinking they have to go into debt to do so. People often think borrowing money to start a business is “good debt,” but they fail to remember that if their business doesn’t succeed they will still owe the money and will have to pay it back without their business producing any income. According to the Small Business Association, 30 percent of small business start-ups fail within the first two years and one-half will fail within the first five years.
To compound the problem, most small business financing requires the owner to have personal responsibility for the loan. This means that even if your business is incorporated the owner is still personally liable for any debt. A business bankruptcy will not wipe out that debt. This is not a scenario that makes for a good night’s sleep when the business is not doing well. I write from experience.
Is it possible to start a small business without debt? The answer is yes, if you begin slowly and build the business with the earnings the business generates. When I began my auction business I started with the bare essentials. I bought an old van with cash to haul items I would be selling at auction. I’m still using that van. I do not own a building, but rent one just for the times when I schedule an auction.
By not owning a building it means that I might handle the items I’ll sell at auction 2-3 times before moving them into the place where the auction is being held. It also means that I do not have to worry about a mortgage or lease payments, insurance on the property, utility costs, building maintenance, or property taxes. I’ll do the extra work to avoid those expenses as I build this business.
Another way to avoid small business debt is to remain at your job while your business is taking off. This will allow you to cash flow some of the initial expenses with money you are making in your other job. Obviously, this is not something anyone wants to do long-term, but when you are starting out you can avoid having to take money out of the business for salary and start-up expenses if you have other money coming in. When I started I bought a quality sound system and other items necessary for auctions, and again I could cash flow those expenses from the income from my other job. The key is to start slowly and allow the business to grow profitable.
Some use their retirement money to fund their new business idea. That is a big mistake. First, you lose the money you would have earned if that money had been left in the investments. Secondly, you will pay a lot of taxes and penalties on the money you take out unless you are at least 59 1/2 years old. Thirdly, if the business fails you have lost money you had set aside for retirement forever. I know one individual who took almost all his retirement savings to remodel a building for a new business he was starting. His business is not doing well, and if it fails he is too old to ever rebuild that savings again. This is a situation to be avoided.
Start slowly. Only buy what you can pay cash for. If necessary, lease what you cannot afford to buy so you do not accumulate debt. Stay in your current job until your new business is profitable enough that you can comfortably devote your full time to it. If you’ll do these things your small business will become profitable much quicker and you’ll avoid the risk associated with debt.