People have different reasons for entering the world of entrepreneurship. But if there is one thing most entrepreneurs would agree to, they are here to make more money. Entrepreneurs enjoy flexibility and creativity; most importantly, they can keep more of the profits they generate.
However, entrepreneurship also comes with its own unique set of financial challenges. Here are four money problems you may face as a new entrepreneur and how to overcome them.
1. Access to Capital
One of the first few issues you may face as an entrepreneur is an access to capital. When starting a business, you may need money for inventory, marketing, or rent. If you don’t have the means to cover these costs, you may need to look for alternative funding sources.
One option is to take out a business loan. This is a good option if you have strong credit or can use an asset as collateral. One downside is that you’ll need to pay back the loan with interest, which can cut into your profits. If you use collateral, you risk losing your personal assets if you can’t repay the loan.
Another option is to seek out investors. This can be a good option if you’re looking for a large sum of money and are willing to give up a portion of ownership in your company. However, remember that you’ll need to answer your investors, and they may want to have a say in how you run your business.
Some entrepreneurs would instead use cash to finance their businesses. This can be a good option if you have personal savings or can generate revenue quickly. Make sure you have enough money to cover unexpected costs, or you may have to take on debt.
2. Lack of Steady Income
When you have a nine-to-five job, you receive a regular paycheck. You know how much you make every month, making it easier to budget and plan your finances.
As an entrepreneur, your income can be irregular. You may have months where you make a lot of money and others where you barely make any. This unpredictability can make it hard to manage your finances and may even lead to financial problems such as debt.
According to a study, up to 51% of entrepreneurs would forgo paying themselves during the first months of operation to control their company’s cash flow. This means they rely on other sources like their savings during those months. Without a steady flow of income, you can quickly deplete your savings and may even have to take on debt.
You can overcome this by creating a budget and sticking to it. Make sure you account for lean months by setting aside money from your good months. You can also look for side hustles or other sources of income that can help you make ends meet during tough times. Experts also recommend you pay yourself a salary, even a small one, to help you cover your basic living expenses.
3. Getting Approved for Mortgage
Buying your own home is a common financial goal. But as an entrepreneur, you may have difficulty getting approved for a mortgage. This is because lenders typically consider self-employed borrowers to be high-risk.
One of the main requirements for getting a mortgage is proving that you have a steady income. This can be difficult if your income as an entrepreneur is irregular. Lenders may also hesitate to approve you for a loan if your business is new and hasn’t yet generated a profit.
You can increase your chances of getting approved for a mortgage by building up your credit score and saving for a larger down payment. You should also be prepared to show the lender documentation of your income, such as tax returns or bank statements. Having a co-signer with good credit may also improve your chances of getting approved for a loan.
Don’t forget to research reputable lenders before applying for a housing loan. Find a local lender who offers quick approval, has years of experience dealing with entrepreneurs wanting to buy their house, and offers honest, upfront pre-approvals. This will help you save time and money and gives you the best chance of getting your business mortgage application approved.
4. Debt
Entrepreneurs often resort to borrowing money to finance their business through a loan or credit card use. If you’re not careful, this debt can quickly become unmanageable. Interest payments on your debt can eat into your profits and make it challenging to keep up with your repayments. If you miss a payment, you may damage your credit score or even default on the loan, which could lead to personal bankruptcy.
One thing entrepreneurs should learn about debt is that there is such a thing as good and bad debt. Good debt is debt used to finance something that will generate income or grow in value, such as a business or investment property. Bad debt, on the other hand, is debt for financing something that will lose value over time, such as a vacation home or luxury car.
To keep your debt manageable, ensure you only borrow what you need and can afford to repay. You should also try to get the lowest interest rate possible and make your repayments on time.
If you’re already struggling with debt, several options are available to help you get back on track. You can negotiate with creditors to lower your interest rates or monthly payments. You can also consolidate your debt into a single loan with a lower interest rate.
Starting your own business is a big undertaking with many financial struggles. From finding the right funding to managing your debts, there are many things to keep in mind when embracing entrepreneurship. However, by doing your research and careful planning, you can overcome these challenges and find success as a new entrepreneur.
