Financing your start up business

So many Estate Agents want to go it alone and start their own business, but the conversations I have daily is that people simply don't have the money. So, lets talk about debt, and because debt can be a dirty word, lets look at good debt vs bad debt.

There is certainly an argument to be made that no debt is good debt. But borrowing money and taking on debt is the only way many people can afford to purchase the really important things like property. But what is the difference between good debt and bad debt?

What Is Good Debt?

Have you ever heard the phrase “it takes money to make money.” If the debt you take on helps you generate income and build your net worth, then that can be considered positive. So can debt that improves your (and your families life is generally a good debt.

A good debt would be classed as worth going into debt for may include:

Education. In general, the more education an individual has, the greater their earning potential. Investing in a degree can often pay for itself within a few years of entering the workforce. However not all professions need a degree - so this may or may not be worth perusing. If it is necessary to gain your career and will repay itself, thats good debt.

Your Own Business. Money that you borrow to start your own business can also come under the heading of good debt. Being your own boss is often both financially and psychologically rewarding. It can also be very hard work. It comes with risks. Many ventures fail, but your chances for success are greater if you choose a field that you are passionate and knowledgeable about.

Your Property / Investment Property. On the residential front, taking out a mortgage to buy a home, living in the home for a few decades, and then selling the home at a profit is good debt. In the meantime, you also enjoy the freedom of having your own home. Likewise, investing in buy-to-let property is also considered good debt.

Think about it, with average tuition and accommodation fees the average student debt in 2020 was 45K with no guarantee of a job at the end of it. Investing in your company will cost you a fraction of this, and you have a job, a career that will grow onwards.

What Is Bad Debt?

It’s generally considered to be bad debt if you are borrowing to purchase a depreciating asset. In other words, if it won’t go up in value or generate income, then you shouldn’t go into debt to buy it. For example:

• Cars. While you may find it impossible to live without a car, borrowing money to buy one isn’t a great idea from a financial perspective. By the time you drive the car out of the showroom the vehicle already is worth less than when you bought it.
• Clothes and consumables. Of course you need clothes—and food, and furniture, and all kinds of other things—but borrowing to buy them by using a high-interest credit card isn’t a good use of debt.

So reduce the bad debt in your life and think about using a loan to finance your business start up.

A Typical Business Projection

For example, say your home bills, inc food and petrol was £2500 a month. Your running business costs £600 on top of this and your repayment loan that you take for your business is £400 a month - that takes your monthly running costs to £3500per month.

If you are a great Estate Agent - ask yourself - Do you back yourself to list 6 properties a month and sell 3 a month and build a pipeline that will convert 6 months? If you do, read on.

Ensure you have a carefully structured plan and a great mentor to keep you on track, ensure you set yourself the right goals (more of this in business planning) then lets see how this could pan out for you.

• You borrow 6 months worth of money to get you though. 21K
• You sell 2 properties a month and from Month 6 you complete on 2 properties a month with an average fee after brokerage splits is £5250
• 500k x 1.5% =£7500 - you bank 70% (£5250)
• x 2 completions a month you bank 10,500 (less your monthly costs of 3500) = 7K

It will take you 3 months to pay back what you have borrowed and now you have a great business to build, you have a great income and time freedom.

Its a risk - so you must have a plan

All business ventures are a risk, you must have a plan, and you must have a dogged determination to make it work. More of this in my next blog where I discuss why not everyone is built for Business Ownership.

Until then - food for thought and I will leave you with this....

"Do not let what you may not earn in the first 6 months eclipse what you could earn in the first 18"