Eau Claire (ANDY SCHLAFER)- The ABC TV show “shark tank” is popular because it speaks to a desire shared by many Americans: to achieve financial independence by starting their own business. Financial advisor Andy Schlafer from Baird shares some strategy when starting your own business.
“Shark Tank” makes starting a new business seem easy, but many new businesses don’t pan out. According to the Small Business Administration (SBA), only half of business start-ups survive more than five years. Fortunately, it’s possible to reduce the personal financial risks of starting a business by making smart choices. The best way to separate business and personal assets is by establishing a limited liability company (LLC) and a separate bank account that can help reduce your personal liability and make tax compliance simpler.
It is also important to leave yourself a cushion when starting a new business. According to the SBA, the number one source of financing for new businesses is personal assets/savings. Set parameters around how much of your personal savings you’re willing to risk.
Many people question using retirement accounts to fund the new business. Some qualified retirement plans like 401(k)s allow participants to borrow from the account. But if you fail to repay the loan within the established time frame, it is treated as a distribution and taxed. You may also face a penalty for early withdrawal. You are also starting over for your retirement savings at that point.
A new business owner may begin in debt as they look to take on funding for the enterprise. Generally speaking, total monthly debt service payments (including housing and personal debt) shouldn’t exceed 36% of your monthly gross income. And keep in mind that if you take out personal loans for your business and it fails, you may have to declare personal bankruptcy. It can be tempting to charge expenses to your business credit card, but most commercial cards charge high interest rates. Also, many lenders require a personal guarantee when someone applies for a business credit card. So even if you’ve kept your business and personal accounts separate, you may be personally responsible for the business credit card debt.
Remember to always have a fallback. If you are a licensed professional, be sure to maintain that license – even if it’s not relevant to your venture. And give careful consideration to continuing to work at least part-time while your business does become a full-time pursuit. It’s a good idea to keep up your skills in case you ever wish to return to your old line of work.