As I did research on bankruptcy to prepare for a freelance assignment recently, I came across a sobering statistic: Nearly half of all personal bankruptcies are the result of failed business ventures.
That was certainly a wake-up call for this entrepreneur. Although I started my business as a “side hustle” to a full-time job and didn’t apply for a bank loan to cover my relatively small start-up costs, I did open a business credit card account to buy office equipment and supplies. That card still carries debt, and since credit card companies can increase rates for any reason at any time, it’s debt that may be more dangerous than that of traditional business loans from banks. Because it’s a credit card, I don’t usually think of it as a loan, but the sobering statistic reminded me that it is.
It’s easy to forget that business debt exists when it’s acquired through a series of small purchases–a package of business cards here, an ergonomically correct office chair there–but it’s debt all the same, and if you don’t have enough business to recoup the loss, you’re in the red. In a sole proprietorship, the business credit card is definitely linked to your personal credit report, and if finance charges add up before the balance goes down, it can do serious damage.
This is especially important to people whose recent involuntary unemployment has inspired them to pursue a long-time dream of entrepreneurship. In taking a business feasibility course, attending business planning workshops, and visiting business counselors, I often came across the same advice given to Hollywood wannabes: Don’t quit your day-job. Unlike counsel given to the less talented, the advice given to would-be entrepreneurs isn’t said because their business idea is bad. It’s given because business is risky. One third of new businesses survive less than two years (see more stats here). Even with a solid business plan, the unexpected can happen. That’s why banks want to know that you’ll have some other means–like a day job, for example–to pay back your loan if your business fails. Once you’ve lost your day job, what can you use to finance your business? What can the bank take as payment? Your business equipment? Your house?
I will be checking with business and financial advisors for a more professional opinion, but from what I’ve read and experienced, if you received a large severance package, you are probably in the best position to start your own company. You don’t have to worry about dual commitments to a full-time job, and you may have enough money saved up to survive on the bare necesseties until the business actually turns a profit. You could even start a franchise in which you have to pay initial and monthly fees, but get strong support and franchise contracts in return. If you were let go with only two weeks of pay or less and were forced to join the unemployment line–and if you have to report any income outside of the unemployment check–you may want to pursue work that you can easily do from home and pursue relatively low-cost options for advertising yourself. Personally, I think giving yourself a business name and purchasing well-designed business cards can give you a more professional appearance. You can buy your own domain name for about $10, put your resume and photos or clips of work samples on your own website, and write off the expenses on your taxes as job search expenses. Whether these low-cost actions end up helping to sustain you through unemployment or they become the foundation of a solid, profitable business, they should help keep you out of bankruptcy court.
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