You have a great business idea, a detailed business plan and the guts to take the leap — but where are you going to get the money to make it happen?
What often holds entrepreneurs back from starting their business is the lack of capital to get their startup running. Many aspiring business owners combat this issue by taking out personal loans. However, this can be a risky endeavor; your individual credit is at stake if your business fails and you’re unable to make payments.
If you’re considering a personal loan to fund your business, ask yourself these 12 questions, recommended by Forbes Finance Council, before filling out that application.
1. What Would The Worst-Case Scenario Look Like?
Taking out loans to finance future growth can be scary. Map out all scenarios from best to worst, and have a plan to deal with each one. Don’t overextend yourself without having figured out what happens if a recession hits, interest rates rise or your project is delayed. – Sharon Bloodworth, White Oaks Wealth Advisors
2. Can I Afford The Monthly Payment?
While a low interest rate is great, the most important question involves the monthly payment. This payment will affect your cash flow, and if your cash flow can’t cover that payment, you can find yourself upside down fairly quickly. Sometimes a lower payment, even with higher interest, can be the more solid long-term approach so that you don’t overextend yourself in the early days. – Danielle Kunkle Roberts, Boomer Benefits
3. Is There Another Way To Raise The Funds?
Often entrepreneurs consider taking out personal loans too quickly. I suggest you think about other alternatives before putting your personal guarantee on the line. Could you perhaps work an extra job, sell some unused clutter, find an investor or lower costs so that the loan is deemed unnecessary? There are always other options out there; you just need to take the time and research them. – Geanette Rodriguez-Ojeda, ARRI Rental
4. Can I Properly Manage The Funds?
Business owners must be honest with themselves by asking, “Do I have the discipline to properly manage new capital that comes in?” After receiving additional financing, owners tend to explore the ranges of their flexibility by making choices they may otherwise not have when they were bootstrapping: Uber versus the subway, upgrade versus economy class. Avoiding a culture change is critical to success. – Damian Lo Basso, Compass CFO Solutions
5. Are My Numbers And Projections Accurate?
Personal loans should only be taken out as a last resort, but before you get to that point, you should really review your numbers (budgets, forecasts, cash flow) and see how accurate they are. Do you usually meet the goals you set? What are the actual results saying when you take the emotion out of the decision and look at the facts? Do you really need this loan, or can you get through this another way? – Khurram Chohan, Virtual CFO Group
6. What Personal Assets Would I Lose If The Business Fails?
No one starts a business and expects it to fail. But, no matter how promising your idea or how hard you work, there is a significant probability that your business will ultimately not succeed. It’s much easier to bounce back from a business failure if your house or retirement savings aren’t on the line. In most cases, guaranteeing a business loan with personal assets should be the last resort. – Ismael Wrixen, FE International
7. Will My Spending And Saving Habits Fit With My Loan Obligations?
As a serial entrepreneur who’s had both successes and failures, it’s easy to develop tunnel vision and to lose perspective, especially concerning finances. Look at your spending habits and look at the amount that you have saved up. Make sure the amount you borrow is within your means of repayment, especially if things go south. – Ben Jen, Ben Jen Holdings SLLC
8. Am I Prepared To Pay Off This Loan?
Entrepreneurs facing funding decisions that include taking out a personal loan need to ask themselves a critical question: “Am I prepared to pay that loan off myself, regardless of what happens to the business?” A personal loan is a personal loan. And, if a budding business needs expensive capital and the entrepreneur doesn’t have it handy, it may be better to look to alternatives. – Brian Daniells, Signature Analytics
9. How Will This Loan Impact My Credit Score?
Be certain to check if this is a personal loan or a business loan. A personal loan will reflect on an individual’s personal credit report. A business loan typically will not report to credit, so if your business should fail, it may not impact your personal credit profile. Be sure to read the fine print. – Bradley W Smith, Rescue One Financial and Simple Path Financial
10. Do I Have A Solid Cash-Flow Plan?
One scary thing about starting a new business is assuring you have the cash flow to succeed. New entrepreneurs will find that they will need to personally guarantee any loans or financing. Thus, if the business fails, you will still owe the money to the bank. To protect yourself, create a cash-flow plan to assure that you will have the cash flow to keep the business going and service the loan. – Scott Bishop, STA Wealth Management
11. How Much Money Do I Really Need?
While you do have to spend money to make money, the amount shouldn’t put you deep into debt. If you intend to take out as much as you can rather than as much as you need, you may find yourself in financial trouble trying to pay it back. Consider your ROI, and select a sensible amount to get your business off the ground. – Greg Herlean, Horizon Trust
12. Do I Have A Great Idea?
Do you truly have a groundbreaking idea? Are you fully committed to the success of your business venture? Are you prepared to pick yourself up and start over if things don’t go well the first time? If the answer is yes, then pursue the personal loan and go forward confidently. The money will find you. – Erik Christman, Oxford Financial Partners
Originally published by the Forbes Finance Council https://www.forbes.com/sites/forbesfinancecouncil/2018/12/19/thinking-about-a-personal-loan-for-your-business-12-important-questions-to-ask-yourself-first/#664b832d32c0