If you have existing debt, you may be wondering if starting a business is a good idea. The answer to this question is yes; however, you need to be smart and responsible enough to manage your debt. Before making your decision it is important to analyze your debt situation.
Here are four questions you must ask yourself before making a decision.
1. What Type of Debt do you have?
Debts are of different kinds; obligations like a student or home loans that have positive long-term potential are considered as good debt. However, debts like credit card dues and cash advances are considered bad as they have no long-term value and are expensive.
Analyzing the kind of debt is crucial because lenders consider it as an important factor. When you apply for a business loan, the lender will check your credit history. If the history reflects inefficient debt management, lenders may be wary of lending money to your business.
2. How is the Debt being Managed?
If you are already having difficulties in repaying your current debt obligations, you need to consider how the additional business expenses will add to this burden. A large number of startups fail within the first five years of operations. However, if you are able to comfortably service your current debt and clearly know when these will be repaid, you must not hold back from starting your business.
3. Have you made a Strong Business Plan?
After analyzing your debt situation, it is important to prepare a detailed business plan. Some of the important points that must be included in the plan are financial projections, products or service offerings, market research and analysis, as well as business strategies and implementation. Preparing a business plan is not only necessary to apply for a business loan but also helps you get a reality check. It will show how you plan to succeed in your business, thereby giving confidence to the lenders.
4. What are the Different Funding Options Available?
Most of the financial institutions require personal guarantees. This means that you are personally liable for the business loan. As a personal guarantor, you are responsible for repaying the loan amount if your business is unable to repay the same. However, there are some non-traditional lenders that offer loans without requiring a personal guarantee. Furthermore, they have simpler loan eligibility criteria and provide the loan even if your credit score is low. However, these loans are often more expensive than the regular types because of the higher risks.
Financing a new business is difficult even if you have no existing debt. However, with strong fundamentals, it may be easier to qualify for a loan. Analyzing your financial situation will help you make the right decision on whether you should start your business or not.