Shape Up!

3. Getting Financially Fit

Getting in shape financially is easier said than done: A Nationwide Financial/TechnoMetrica survey of 501 small-business owners conducted in February 2003 found that only one-third felt they had been prepared financially to start a business. You don't want to become a statistic, and you don't want to be turned down for financing because you look too risky to investors. So how do you get financially fit to be an entrepreneur?

It starts with a look at your personal finances. Sit down and estimate the impact of the business on your family's personal finances for the next three years, then work out a new household budget. Make sure your family understands how they will need to sacrifice for a few years as the business grows. Do this now, not after you start your business. "Cut your personal expenses down to the bone," Chasen says. "Be prepared to take as little out of the business as you possibly can so you allow it to flourish."

Credit card debt makes you look like a risk, so get rid of it or at least minimize it, says Mike Sherman, an SBA loan officer with CornerstoneBank in Atlanta. Credit card debt "is just that much more money taken out of the business to sustain a lifestyle," he says. "It looks better when [a start-up] comes in to borrow money and they have no personal debt." If you're overextended on your credit cards, consider consolidating all this debt, possibly into a mortgage on your home. "Get that monthly payment as low as possible," Sherman suggests.

The majority of start-ups Sherman lends to are franchise operations, which are safe bets from a banker's perspective. But the few non-franchised start-ups he's funded over the years have a few things in common. First, these entrepreneurs have good, in-depth business plans and solid presentation skills. Second, they have attractive equity--a good home and so on--and bring their own cash to the table, anywhere between $10,000 and $20,000 to secure a $100,000 bank loan, for example. "If they're serious about getting into business, they have to make sure they have cash available to put into the business," Sherman says.

Lenders will run your credit report before you've warmed the chair across from them, so having a good credit score is essential. Get a copy of your credit report before you approach lenders. That way, you can anticipate questions they'll have about late payments, collections, judgments and so on. If you have a business partner, answer the hard questions--who will be majority stockholder, for example--before you seek funding. Professional advice from an attorney or a CPA looks good to bankers, too. "It makes me think [the entrepreneurs] know what they're doing," Sherman says. "All these things should be worked out between two parties before they come to the table."

Taking the time now to assess your emotional, mental and financial fitness will make you stronger for what lies ahead. With a little bit of thought and planning, you'll find that your dream business can turn out exactly as you dreamed.

Financial Fitness Checklist
If you can't answer yes to these 10 statements, you will have to work on your financial fitness:
  1. I have enough collateral to cover 10 to 20 percent of any bank loan I seek.
  2. I've eliminated all my credit card debt.
  3. I've budgeted the impact of this new business on my personal finances for the next three years.
  4. I'm prepared to live on very little and take very little out of the business until it's cash-flow positive.
  5. My family understands the impact this will have on our lifestyle, and they know how they'll have to adjust financially.
  6. I've read my credit report to understand my credit score.
  7. I've anticipated comments lenders will make based on my credit report.
  8. I've written a thorough business plan.
  9. I've had an expert critique my business plan before I seek funding.
  10. I've set aside 12 months' worth of savings to live on.

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Chris Penttila is a Washington, DC-based freelance journalist who covers workplace issues on her blog,

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This article was originally published in the October 2003 print edition of Entrepreneur with the headline: Shape Up!.

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