Is it Within Your Financial Means to Launch a Business Venture of Your Own?
Starting a business is an exciting venture, but it's essential to ensure financial readiness before taking the plunge. Here's a guide on the key areas to focus on to assess your financial readiness.
Managing Debt
Review your current debt obligations and understand your Debt Service Coverage Ratio (DSCR), which measures your ability to pay debt with your cash flow. This helps avoid over-borrowing or financial stress after starting the business. Use cash flow projections under different scenarios (conservative, realistic, optimistic) to test affordability.
Credit Score
Check your personal and business credit scores because lenders will use these to assess your creditworthiness when you apply for loans or financing. A strong credit score improves your chances of qualifying for loans with better terms and lower interest rates.
Savings
Have sufficient savings to cover startup costs and maintain a cash buffer for unexpected expenses or slow revenue periods. Savings reduce the need for excessive borrowing and provide financial stability early in the business lifecycle.
Additional Steps
- Review Financial Documents of the business (if buying one) like balance sheets, cash flow statements, debt disclosures, and tax returns with the help of a CPA to understand profitability and risks.
- Clearly outline how you will use the funds you raise (for revenue growth, cost savings, operational efficiency) to ensure strategic fund management and lender confidence.
- Consider completing a Profit Readiness Assessment or a similar financial planning tool to evaluate your current business financial foundation or personal preparedness for business profit planning.
- Evaluate target markets, competitive landscape, and financial strategies to further strengthen readiness beyond just financial metrics.
In summary, financial readiness combines knowing your debt limits, maintaining a healthy credit score, and having enough savings plus a clear strategic plan for using funds. Testing affordability through cash flow scenarios and reviewing financial documents is crucial before starting a business.
It is strongly advisable to ensure debt is manageable before starting a business, and if savings are not available, consider delaying business plans for 6 months or a year to accumulate savings. Keep in mind that over 90% of small businesses fail within their first year, so it's essential to be as prepared as possible.
- Before starting a business, it's crucial to manage your debt effectively by understanding your Debt Service Coverage Ratio (DSCR) and using cash flow projections under various scenarios to test affordability, as this helps prevent financial stress and over-borrowing.
- A strong personal credit score improves your chances of qualifying for loans with better terms and lower interest rates when starting a business, making it essential to check your credit score before launching your venture.
