Being an entrepreneur is risky business. But that doesn't mean you should put your personal financial health at risk over the excitement of a new business venture. Here are six reasons why every young entrepreneur needs to build credit and remain in good financial standing.
1. Your credit score says it all. Your credit score is something that will follow you throughout your life. Credit reporting agencies collect information on you ranging from your birth date to how many credit cards you have to what your loan payment history is like. A credit report can also include details of when you've been arrested or sued.
The Federal Trade Commission says once your credit score has been damaged there is no quick fix. "Only time, a deliberate effort, and a plan to repay your bills will improve your credit as it's detailed in your credit report," the FTC says.
A bankruptcy filing remains on your credit report for 10 years.
2. You may need partners. At some point in your journey you may need to transition from being a solopreneur to adding a partner. Would you want to share your business with someone who couldn't keep their own finances in order? Your potential partner feels the same way.
3. You may need investors. Entrepreneurs need cash. Whether it's money to fund the startup or to fuel a period of growth, entrepreneurs often turn to investors for an infusion of capital.
Those investors will want to learn everything about the business owner as they try to make a decision about whether or not to risk their money in a venture. If an investor learns that the entrepreneur wasn't able to manage his or her own money, there's not much chance that investor will offer up some of their own.
4. You may need a loan. At some point you might have to borrow money. It might not just be for business expenses; you might want to buy a home or a new car. But if your credit is wobbly you might get rejected.
In the current economic climate, lending is tight. Borrowing money for business or personal use requires excellent credit.
5. You may want to start another business. Your current business may not be your last business. Many successful serial entrepreneurs cash out of one venture and then begin another. Staying on the right financial track makes it easier to navigate through different projects and their varying stages of financial success.
6. You may want to retire someday. It may be difficult to imagine a time when all of your energy isn't focused on business development. But there will probably come a day when you'll want to trade your laptop and smartphone for a hammock and a lemonade. It takes years of financial planning and discipline to be able to afford to exit the business world.
The Small Business Administration has identified the following steps young entrepreneurs should take to safeguard their finances as they begin a new venture.
- Build a cash reserve. Have money tucked away to get you through rough spots and emergencies.
- Separate personal finances from business finances. Don't let your accounts mix and mingle and keep detailed records so you know what you are spending in which part of your life.
- Pay yourself. Even if it's not the seven-figure salary you dream of making one day, the business should pay you something for the work you do.
- Don't overinvest in the business. Don't sink every last dime you have in a new business venture.
- Keep debt-to-income ratio low. Don't max out company and personal credit cards to fund the business or keep your personal life afloat. Credit card debt is very expensive.
- Seek financial help. Finance is not a simple topic. Just because you have a great idea and a business plan doesn't mean you've mastered preparing income statements or filing payroll taxes. There are professionals who excel in those tasks and they may be able to help you preserve your good financial standing by eliminating costly mistakes.
Carla Turchetti is a veteran print and broadcast journalist who likes to break a topic down and keep her copy tight. That's why this bio is so brief! Carla blogs via Contently.com.