Risky New Business - What To Watch Out For With Start-up Funding
Starting your own business can be a dream come true - but sometimes that dream can
become a nightmare if you do not know the risks associated with business start-up funding. If you want to cover your new business interests and "assets" then you need to know the disadvantages that come with different borrowing options.Hanging on by your bootstrapping
The disadvantage of bootstrapping is a lack of capital - unless you're already rich! That lack of capital can be a significant constraint and if you can't afford to keep the business moving forward, you're facing trouble. Unfortunately, first-time bootstrappers seem to under-estimate what things will cost so they misjudge their business start-up funding needs.
401K is not always o.k.
There is a downside to removing funds from a 401K or similar type of account. That's because it often carries penalties for early withdrawal and it's not uncommon to lose a portion of that money as part of the withdrawal penalty, in addition to having to pay taxes on the amount used. Using your 401K for your business start-up funding is a serious consideration and one that you really need to weigh all of the pros and cons and how they will impact you long term.
No rewards for extra credit.
Using a personal credit card for your business start-up funding is easy - but easy does it! Later, adding new business credit card accounts will be encouraged (we all get those in the mail) and can be opened to cover the ongoing financing challenges. Be warned, varying interest rates and high credit limits can cause your debt to pile up, making it hard to climb out of that financial pit. Even credit cards that promise a low, introductory rate can quickly rise, especially if you are late on just a single payment. If credit card debt continues to build and you're late on payments, it will negatively impact your personal credit rating, which will make it more difficult to secure other funding options in the future.
Home not-so-sweet home.
When using your Home Equity, this type of loan comes with a floating interest rate and a large balloon payment. Should the housing market suddenly shift and interest rates soar, you may be unable to make the rising mortgage payments. If this happens, you risk losing your home. Again, like the 401K, you should weigh the pros and cons and long term impact on you and your family if you are considering this option to gain business start-up funding.
Don't' bank on it.
The downside of bank loans and credit lines are - in addition to needing a solid credit history to even get the loan - you must keep up with your regularly scheduled payments. Since small businesses and considered "high risk" by most financial institutions, they will monitor your business progress - or lack thereof - very closely.
Friend, family or Foe?
Borrowing business start-up funding from family or friends can have its downside. Remember the old saying "neither a borrower nor lender be?" To avoid any family feuds, it's advisable to draw up an amicable loan agreement that clearly states the amount loaned, whether or not there will be interest charges, and a plan for repayment. Keeping the peace is far more important than losing peace-of-mind when it comes to our family and friends.
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