First, let’s face the fact that when you get into business for yourself, success is never guaranteed. There are too many factors that go into a business’s success or failure to predict anything. It depends on your industry, capitalization, and factors beyond your control. But, the biggest problem is managing your personal finances after such an experience.
As a general rule, 20% of small businesses fail in their first year, 50% don’t make it past their fifth year, and 70% fail by their tenth year. Ten years in business for yourself is a great run, but the numbers shine the light on the odds that yours may not make it.
Entrepreneurs are all about taking risks. If business success was guaranteed, everyone would do it. But it never hurts to prepare. Whether you’re about to go into business for yourself now or your business recently closed up shop, you should know how to navigate your personal finances in the aftermath.
#1 Pay Off Credit Cards and Personal Loans
When you bet on yourself, sometimes you have to follow it up with cold, hard cash. Many small business owners have to rely on their personal credit cards to cover business expenses. Some even deliberately use consumer credit cards rather than business accounts because they offer greater protections.
If you fold your business and you still have extensive personal debts related to it, consider credit card debt counselling to manage it. Credit card debt after closing your business can be very difficult to deal with. You’ve just lost your primary source of income and you’re likely trying to get by freelancing, consulting, or looking to work for another company.
Credit card debt counseling aims to reduce or eliminate the interest rates you pay while also helping you target your debts, manage money, and budget your way out of debt.
#2 Keep Your Personal Line of Credit Out of It
Using your personal credit to fund your business is relatively common, but a line of credit is a particularly dangerous type of loan to get. If you’re looking to start a business but weighing the risks now, one of the best things you can do for yourself is to avoid using a personal line of credit to buy or fund your business.
A line of credit can seem very tempting. You only have to pay off the interest, not the principal. But interest rates are higher than business loans that require collateral, and you can wind up with tens of thousands in personal debt if your business fails too soon.
#3 Rebuild Your Credit
If you’ve been relying on loans to keep your small business afloat, your credit score is likely to have taken a nosedive. Before you dive into your next big project, take the time you need to restore your credit history and put yourself in a better position to borrow again in the future. Entrepreneurs are restless at heart, and it’s only a matter of time before they start dreaming up their next big venture. Put yourself in a strong position by rebuilding your credit, something you can do by clearing all of your debt and paying your credit card bills in full and on time.