There were nearly 5.4 million new business applications in the United States last year, according to an analysis of Census data by the Economic Innovation Group, the highest number of startups launched in a single year that has been recorded. And that came on top of a record year in 2020. But not every startup is the next Apple or Netflix. While there’s potential for great long-term benefits to entrepreneurship, there are also a lot of financial hurdles to clear along the way. For starters, about a third of small businesses fail within the first two years, according to the Small Business Administration.
“In the world of entrepreneurship, many seek and few are chosen,” said Clark Kendall, President and CEO of wealth management firm Kendall Capital in Rockville, Maryland. “You have to go in with your eyes wide open to the risks.”
When it comes to your personal finances, the risks of starting a business can include losing some — if not all — of your savings, your income, and possibly your assets, if you’re not careful. There’s also opportunity risk.
“You could have worked for someone else and received a steady paycheck instead of risking starting a new business with unknown future revenue and income,” Kendall said.
That said, for the businesses that succeed, there’s also plenty of potential upside. But no matter how focused they are on the business, it’s important for small business owners to think about their personal finances as well. If you’re ready to join the growing ranks of the self-employed, take the following steps to protect your finances:
1. Prepare for a financial sacrifice … at first
Most businesses don’t make any money at all for the first few months (or longer). If this is your full-time focus, that means you likely won’t be making any money for a while. If possible, start ramping up your personal savings before you launch the business, so that you will have resources to cover your bills and living expenses during that period.
Chad Parks, founder and CEO of Ubiquity Retirement + Savings, recommends having at least six to nine months’ of expenses set aside if you’re starting a business and don’t have any other income to fall back on. Consider that money untouchable, and only for use within the business.
“When you’re starting a business, there’s always a sacrifice up front. That’s on the financial side, as well as in time to get the momentum going,” said Nick Foulks, director of communications strategy and client engagement at Great Waters Financial.
Once the business starts generating revenue, you’ll want to start setting aside cash reserves as well — up to a year’s worth of business expenses — so that you can …….