What Home-Based Business Owners Must Know about Debt

By: Jo Ann Lequang

The statistics can be depressing--most new businesses fail. Home-based businesses fail at a high rate and the sad fact is many such enterprises are actually sound, financially viable ideas. The reason so many businesses crash before they get started is that their owners lack the financial resources required to launch a successful business. Even a small home-based business, freelance career, or simple part-time operation requires serious advance financial planning and resources. A home-based business can be a money-maker, but don't count on making much money quickly.

Most business advisors recommend that a new business owner sock away enough money to support himself for a year or more before embarking on a business.

This does not mean that the business will not take in money, even early on. Most small businesses will do a little business at first and maybe even a fair amount of business in a short time. However, small businesses will have a disproportionate amount of expenses in these first months and years.

You'll be surprised by the expenditures you'll have in the first year; you have to buy all of your equipment, supplies, permits, software, and so on. These seemingly minor items can end up costing you thousands of dollars. Covering those expenses can be tough. Even when a new business starts to earn money, it is not unusual for it to post losses in the early months because necessary expenditures simply outpace earnings.

Besides saving money for the day you start your business, you should also work very hard to reduce your personal expenditures. Anything that can be paid off before you start your business should be paid off. Besides, it will be good practice for the new business owner to practice living more frugally! Most new businesses will take a lot of financial flexibility and learning how to live on less is a great skill that just about every business owner will tell you is important.

If you have debt (and who doesn't?) you may want to consider something known as debt consolidation. Before you get riled up, debt consolidation is not bankruptcy or debt settlement. It's a perfectly legal, ethical way to roll your many small debts together in one package and then negotiate a better loan on the large amount. The idea behind debt consolidation is that you may be able to restructure (consolidate) your debt in such a way that you will have to pay less interest to pay it off.

Debt consolidation won't hurt your credit report. In fact, it could actually improve it! That's because debt consolidation means you get a big loan to pay off your smaller debts. Paying off a debt usually improves your credit. And if you manage the larger debt consolidation loan well, that will help your credit, too.

By the way, a good credit score is essential for a new business owner!

But how does it work? In theory, you gather your debts. Let's say you owe $5,000 on a department store credit card that charges 22% a year interest. That may sound exorbitant, but it is not all that unusual. The interest on a loan like that is $1,100 a year!

Let's say you have some other loans. For the purpose of illustration, let's say you have one credit card maxed out to $10,000 at 16% ($1,600 interest a year) and another credit card that charges 14% where you've charged $3,200 ($448 a year in interest).

Put these three amounts together and add them up. You'll end up with $18,200 in debt. Now let's just say for theory's sake that you can find a new loan for $18,200 that charges just 12% interest. You get that new loan, use it to promptly pay off your three charge cards, and now you pay off the one new loan. By the way, 12% of $18,200 is $2,184 in interest a year.

Consolidating that debt saves you $964 a year in interest. You have to pay $80 a month less. If you are really savvy, you'll take that $80 and apply it toward the principal. You spend the same exact amount of money, but you will get out of debt significantly faster.

That's a small picture of debt consolidation. You can also roll in car notes, student loans, medical bills, and other debts.

Of course, debt consolidation can be tricky. First, it may not work for you-you may owe money but at rates that are already as low as you can get. Second, you might want to get a lower-interest-rate loan but cannot qualify. It helps if you own your own home, but even if you do not, there are other ways to consolidate your debt.

If you can consolidate and pay off your debt, you'll have a tremendous business edge, one that is hard to appreciate until you've been in business for a while. The lower you can reduce your expenses and the more adjustable you are to living modestly during the early years of your business, the more freedom you'll have and the more time you'll have to give your business the start it deserves!

For more information on debt consolidation from a site that is not run by a financial organization, please visit http://www.debt-consolidation-diva.com . This article was written by Jo Ann LeQuang, who owns a freelance marketing communications company based in Texas and runs the site http://www.WorkingTexasWriter.com .

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