One of the main problems that people run into in their first year of business is surprisingly mundane: How will you pay the normal household bills and expenses when the business is playing Godzilla with your cash flow and you can’t afford to pay yourself a salary? How are you going to keep a roof over your head?
Most financial experts advise that you start planning for your business far enough in advance to have a sizable financial cushion—enough to live on for a year—but let’s face it: in the real world, such plans are not so feasible unless you come into a large inheritance or win the lottery.
The most common way to get a business off the ground and to keep the household bills paid is to have a supportive partner or spouse with a regular paycheck. Sometimes, this is negotiated by a series of trade-offs the couple makes together: If I can start my business and you pay the bills, when the business is pulling its own in a couple of years, then you can start your business, or go back to school, or take a year off.
To streamline your financial situation and thus reduce your monthly household obligations, it’s a good idea to pay off as much credit card debt and other loans as you can. If you can’t manage to pay all or most of it off, you should look into consolidating your total debt. (You may even want to trade in your current car for an older model to reduce your car payments.) Once you open your doors for business, you’ll want to have as much cash as possible to sink into the business. You’ll also want to have money available for emergencies and for paying your household bills on time.
Reducing your monthly debt obligations is one way to do it. You may also want to choose this time to refinance your mortgage in order to lower your monthly payments and free up more cash for the business.
With the advent of home-equity credit programs—paid out either as a loan or available as a line of credit you can tap into when necessary— many entrepreneurs are taking advantage of years of mortgage payments to draw on money to start their businesses. The interest rates are lower, but since such programs put your house at risk should your business’s income slow down, you should consider this option carefully.
Whatever you choose, make sure to apply for these programs before you leave your current job while you can show as much household income as possible. Later, based on just one paycheck and the shakiness of a new enterprise, banks and credit companies may not look as favorably on your status.
