Being modest with your money doesn’t just mean you spend less, look for deals, and maintain good credit; it goes far beyond that. Most of our readers aren’t just looking for credit score tips. You guys are coming up with side hustles, starting websites, starting your own home business, opening up more businesses, and eventually living a financially free life. With that said, today, we’re not going to talk about personal finance basics…you’ve got tons of resources for that! Today, we’re going to talk about financially preparing to become a small business owner.
Imagine Your Credit Score Not Being As Valuable
As consumers, our credit combined with proof of income is enough to get us a new car, a new house, a credit card, cable TV services, or whatever item or service we may need. However, when you become a business owner and leave your employer, you don’t necessarily have the proof of income side of things. As a matter of fact, my business partner recently had to buy car cash. He has great credit, and a good amount of money coming in regularly. However, our business is very young, so there is no long term proof of income. Therefore, he couldn’t be approved for the car he wanted. Instead, he had to pay cash for a lower value car.
This basic concept holds true when it comes to buying just about anything. Even with great credit, you’ll have to pay higher down payments on homes, and may need to buy your cars cash. For the first 2 or 3 years of owning a business will be a time when you’ll need to be most prepared for this hurdle.
It’s important to remember that your credit score isn’t worthless either. When you go to sign up for a merchant account, they’re going to check your credit. If it’s not good, chances are, you won’t be approved. So, your credit score is valuable, just not in the same ways for the first few years.
Consider Down Times
When I decided to leave my 9 to 5 job, it was a huge decision that I made entirely the wrong way. I made a rash decision to quit my job with less than 24 hours to think about it. I signed a contract, my income was there, and I was out! The only problem is the company I signed a contract with didn’t fulfill on their obligations. I then found myself working 14 to 16 hour days to try and make up my losses. However, if I had planned for something like that to happen, I would have been in a much better place.
Before going out on your own, make sure that you’ve got the financial stability you’ll need. Think about how much money you’ll need to survive if you had to go 3 months without being paid a dime. How divide that number by 12 and make that your annual savings goal. Go open a Betterment account and invest to help your money grow faster. When you’ve got enough saved to make it for 3 months, you should be OK for down times.
Think About State and Federal Tax Regulations
Let’s face it; there are only 4 things we absolutely have to do in life. Those are eat, sleep, go to the bathroom, and pay our taxes. However, being taxed as a consumer is far different from being taxed as a business. Be prepared to have to hold back a large portion of the money you make to offset the tax obligations your company will create. I find it best to hold back your entire tax rate. For me, that’s 28%. At the end of the year, I file write offs and that percentage goes down. Whatever is left in my bank account is now what I consider to be my tax return. It’s the same basic concept, you just have to do it on your own when you’re in business.
Although these are what I find to be the three most important things to consider before branching out on your own, there are tons of other factors to consider. The best thing that you can do is remember that knowledge is power. The more knowledgeable you are about what you’re doing, the better you’re going to do it. So, before branching out on your own, do your research and make sure you’re ready for the leap!