Maria Aspan, Special to USA TODAY Published 12:13 p.m. ET Feb. 12, 2019 | Updated 12:46 p.m. ET Feb. 12, 2019
“Should I go into more debt to start my business?”
The woman was soft-spoken, polite, patient. She had waited until the end of an Inc. conference session I was moderating, about how small-business owners could get loans and other financing, to approach me with her story. She was trying to pay off a sizable amount of credit card debt, and she wanted my advice: Could she make money more quickly by starting her own business? Would that be worth going deeper into the hole?
Launching a startup might seem like a good way to get rich quick – or at least get out of personal debt – at a time when companies like Uber, Lyft, and Airbnb have raised billions of dollars apiece. But such high-profile success stories are the exceptions to the brutal rule for entrepreneurs: About half of all startups fail within five years, according to the Bureau of Labor Statistics, and two-thirds fail within 10 years.
“That means you have a high probability of losing any and all money you put into your business,” I write in my new book, Startup Money Made Easy: The Inc. Guide to Every Financial Question About Starting, Running, and Growing Your Business (HarperCollins Leadership, 240 pp., released Feb. 12). “It’s like any other risky investment: There are potentially huge upsides, but the downsides are far more statistically likely.”
It’s an important warning, but not a blanket one. Starting a business can be exhilarating, life-changing and financially rewarding – as Daymond John, Sallie Krawcheck, Jack Ma, Bobbi Brown, and many other successful startup founders describe in the book. You just have to know what you’re getting into, and how to take the right risks. For example:
Can you afford to live without a salary for a year or more? The most successful startup CEOs often wait at least several months before they start paying themselves, Inc. data shows. Only 28 percent of respondents to the 2018 Inc. 5000 CEO survey, which polls the heads of the fastest-growing private companies in America, started taking a salary immediately after starting their business. When they did start paying themselves, 45 percent of these CEOs paid themselves less than $50,000 annually. That’s not exactly Jeff Bezos money.
Have you written out a business plan, complete with a financial section? Yes, most business plans rarely anticipate all the realities of running a business. But spending some time predicting your expenses, cash flow and break-even point will force you to think through the financial risks you’re about to take. It will also get you ready to raise money and apply for loans, since outside investors and banks will expect to see a business plan.
Do you know how much money you need to start your business? Finally, some good news: It’s easier and cheaper than ever to start a company these days. Think less than $5,000; that’s what 42 percent of 2018 Inc. 5000 CEO survey respondents said they used to start their first business. You might need more than that, or less; it depends on factors including where you live, the type of company you want to start, and how many employees you need. But if you’ve saved up a few thousand dollars to invest in your dream company, and you can afford to risk it all, you may be in good shape to take the startup risk.
Which is why I begged that woman at the conference to avoid that risk right now. I recommended that she get in touch with the National Foundation for Credit Counseling, a nonprofit adviser for people struggling with debt, and focus on trying to get her financial health back, first. I hope that she’ll soon be in a place where she can start her business – and where she, and everyone else who wants to start a business, can afford to take the right entrepreneurial risks.
Maria Aspan is an award-winning business journalist and an editor-at-large at Inc. magazine, where she oversees money coverage and writes about startups, technology, finance and gender. She has also covered business and finance for the New York Times, Thomson Reuters and American Banker. At the latter, she served as national editor and covered the 2008 financial crisis and its aftermath.
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