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The Entrepreneur’s Guide to Personal Finance

The Entrepreneur’s Guide to Personal Finance 10
1 2 3 4 5 6 7 8 9 10 11 The 12 13 14 Entrepreneur’s 15 16 17 18 Guide to 19 20 21 Personal 22 23 24 25 Finance 26 27 28 29 30 31 contents 1 2 3 4 The Entrepreneur’s Guide to Personal Finance 5 6 7 Prosperity and success are what many entrepreneurs envision when 8 they start their own business. However, it takes more than a vision for 9 your business to succeed. Capital, the money needed to start, operate, 10 and grow a business is important, as is managing your personal finances 11 while balancing the demands of your business. Fortunately, you have 12 options when it comes to funding your business and the opportunity to 13 gain the skills you need to effectively manage your finances both at work 14 15 and at home. 16 This guide on personal finance for the small business owner was made 17 possible through a relationship with Money Management International 18 19 (MMI) in partnership with the Citi Foundation. In this guide, we hope to 20 provide you with viable ways to turn your ideas into a plan, market and 21 finance your business, and become even more capable of succeeding at 22 your business ventures. 23 24 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 In this eBook, we’ll explore how to 24 plan your business, which will give 25 26 you direction and help relieve some of 27 your fears about the risks of becoming 28 an entrepreneur. You will also spend 29 some time learning about personal 30 finance and how your personal financial 31 situation relates to securing a loan for your business. contents 1 2 3 4 5 6 Table of Contents 7 8 9 Chapter one: Is small business ownership right for you 10 11 Chapter two: Your business model 12 13 Chapter three: Your idea and testing the market 14 15 Chapter four: Finances 16 17 Chapter five: Business structure and taxes 18 19 Additional Resources 20 21 22 23 24 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 Chapter one: 10 11 12 13 1 14 15 16 17 18 19 20 21 Is small business ownership right for you 22 23 What ideas do you have about small business ownership Does it sound risky Do you think of the famous BachmanTurner Overdrive 24 lyrics: “It’s the work that we avoid, and we’re all selfemployed; we love to work at nothing all day...” 25 26 Rock songs aside, the truth is that owning a business is work. Small business owners typically wear many hats. Take a freelance photog 27 rapher, for example. It may seem that he just makes a living by snapping photos, but he’s also responsible for marketing, sales, website 28 design, invoicing, and more. Even if he hires out some of the work to subcontractors, he is still ultimately responsible for the results, as his livelihood depends on them. 29 30 In the article “How to Decide if Entrepreneurship is Right for You,” Colleen DeBaise describes the commitment entrepreneurs must 31 make to their business as follows: “Starting a business is a lot like becoming a parent. Not only do you have to prepare for your startup emotionally and financially, but you have to be committed to its constant needs until it’s mature enough to hum along on its own. And even then (much like a child) it will always need you in some capacity, no matter how old it gets.” Just as with anything else, there are pros and cons to entrepreneurship, and you need to take some time to decide if owning a small business is right for you. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 Owning a small business is more interesting work. Presumably you want to start a business because it’s something about which you’re passionate. This is very appealing for people 9 who are stuck in a job that they hate or that simply doesn’t challenge them. 10 11 Entrepreneurs can set their own schedules. Depending on the type of business you want 12 to start, you can enjoy a more flexible schedule than an employee. 13 Entrepreneurs work harder, but they also directly benefit. While an entrepreneur might 14 have to put in 12hour workdays, some salaried employees start to wonder if being salaried is 15 really that much of a benefit when they’re working late several days a month — for the same 16 amount of money. With the small business, if you decide to burn the midnight oil to ship out 17 another order, your bank account sees the results. 18 Unlimited earnings and growth potential. The U.S. Small Business Administration reports 19 that on average, selfemployed people earn higher incomes than employees. It’s important to 20 note, however, that there’s a wider variance in incomes among the selfemployed, and earnings 21 To start, let’s examine are lower at first, then grow and surpass the income of traditional employees. 22 how being a small Greater potential rewards come with more risk. According to the U.S. Small Business 23 Administration, roughly 50 percent of small businesses fail within the first five years, typically 24 business owner compares for reasons like insufficient capital (money), poor inventory management, poor credit arrange 25 ments, and personal use of business funds. While nothing, including a day job, is secure, small 26 with being an employee business owners have to be prepared to handle a variable income, meaning that there might be 27 some months when you’re making a lot more money than others. Planning is critical to keep your 28 business running smoothly. 29 There are no guarantees, either as a salaried employee or as a small business owner, but there are 30 ways to increase your chances of succeeding as an entrepreneur through careful planning. 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 Have you thought about what kind of business Turning your ideas into a business plan 7 you want to start Chances are, you have 8 a few ideas, but before you get too much 9 further, let’s look at the components of a good business plan. 10 11 The following ten questions are adapted from 12 the book StartupNation: Open for Business and 13 will help you to formulate your plan: 14 What’s your business idea 15 16 What model suits you best 17 What’s your role going to be 18 Who’s on your team 19 20 Does your idea address a need 21 What’s different about what you offer 22 23 Is there a market for your product or 24 service 25 How much are customers willing to pay 26 How much money do you need to get 27 started 28 29 How will you get startup funds 30 You can probably answer the first question, or 31 at least jot down some ideas. Keep a dedicated file or notebook to answer these questions as you read through this eBook. Also, know that your plan will be a living, breathing document that you’ll edit as you develop your business. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 There is no such thing as a onesizefitsall plan. From Inc.com: 5 6 7 “There are scores of websites these days on the Internet 8 9 that offer to sell business plans for 20 or more, designed 10 11 to let you enter your company name and specifics and 12 generate a plan. These are about as valuable as the paper 13 14 they’re printed on…The reason is that each business is 15 unique and, therefore, each business plan should be a 16 17 unique document to be truly worthwhile to the business.” 18 19 Read the full article, “How to Write a Great Business Plan,” on Inc.com. 20 21 22 23 24 25 26 27 28 29 30 31 contents 1 2 3 4 5 6 Chapter two: 7 8 Your business model 9 10 11 12 What model suits you best 13 2 14 Before we get into specific business models, think about how much time you want to commit to your business. 15 Will it be a parttime gig, a fulltime career, or something you do only on the weekends or during holidays 16 17 For example, a stayathomeparent might have some free time as the kids get older, but not enough to commit 18 to a fulltime business, so parttime is more practical. A fulltime employee might like his or her job, but wants to 19 make extra cash before the holidays selling handmade ornaments, so the business would be seasonal. 20 21 Ramit Sethi, New York Times bestselling author of I Will Teach You To Be Rich and the blog of the same name, 22 writes: 23 24 “Think of earning money as an opportunity to make a series of small bets in order to rapidly find one that’s 25 profitable. If you want to scale up and go fulltime, great But most people don’t ever need to do that. It’s nice making extra money on the side and giving yourself more opportunities to do the things you love.” 26 27 If you want to make your business your primary focus, it’s a good idea to start it as a parttime business in the 28 beginning, then transition it to fulltime once you have enough business to support you. This will allow you to 29 test your ideas before making the leap to fulltime. 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Business models: Pros and Cons Thanks to technology, there are several business models available to 4 entrepreneurs today. Consider the following models, along with the 5 pros and cons of each: 6 7 8 9 10 Homebased and/or eCommerce. Traditional brickandmortar. 11 A homebased business is run from your house and typically makes use of technology for These businesses include retail stores, offices, or any other location that involves buying, 12 daytoday operations. eCommerce businesses sell products or services online through a renting, or using real estate outside of the home. 13 website, either their own or an established one like eBay or Etsy. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pros: Cons: Pros: Cons: 29 30 31 Lower startup and operation costs; Local government restrictions might not More social interaction; can attract Greater risks and higher overhead costs can fit work around life commitments; allow customer traffic; home distractions walkin customers who might for rent or purchase of space; requires Webbased businesses can operate on can impede work; work can be isolating; otherwise not know about your fulltime commitment to ready the a global levelsellers on eBay will have may need to outsource some work if business; minimizes distractions with space; may require hiring and managing to compete with established sellers. you’re a oneperson operation; online busi a dedicated work space. employees; may require initial inventory nesses might face a lot of competition, for purchase. example, new sellers on eBay will have to compete with established sellers. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Business models: Pros and Cons 4 5 6 7 8 9 10 Franchise. Multilevel marketing (MLM). 11 In this business model, the sales force is compensated for their sales and the sales of others When you buy into a franchise, you usually pay an upfront fee plus a percentage of your profit 12 they recruit, creating a hierarchy where the higher up you are, the more money you make. to the franchisor. Essentially, you’re paying for an established name and business model. Unfortunately, the ones at the top are far more successful than the ones at the bottom, who 13 often lose time and money. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pros: Cons: Pros: Cons: 29 30 Likely to be less risky because you’ll Upfront fees can be high; guidelines Usually have limited startup costs; Most people lose money because the 31 receive a business model; the name is are strict and limit your control over the possible workfromhome business process seemed easier than it is in reality; established. business; you have to pay the franchisor a with flexible schedule; salespeople selling to people in your social network cut of your profits. receive a structured business plan to (such as friends and family members) and follow. trying to recruit them can create tension and awkward situations; some MLMs are scams and every model needs to be carefully vetted. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 What’s your role going to be, and ... who’s on your team 6 7 8 9 10 11 12 13 14 15 After considering your time commitment and business 16 model, you probably have a better idea of what your 17 role will be and who will be on your team. If you want to 18 run a parttime eCommerce business from home, you’re 19 most likely taking on multiple roles and working by 20 yourself, or maybe with a partner. If you are opening up 21 a retail store, you will be the owner, and you’ll probably 22 need employees. This means that you’ll also be the 23 manager, unless you hire someone to fill that role. 24 It’s important to consider what your role will be so that 25 you can determine costs for outsourcing, if applicable, 26 and for any necessary employees you may hire. Both of 27 those factors affect your bottom line. 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 Your idea and testing the market 6 7 Chapter three: 8 9 3 10 11 12 Does your idea address a need 13 14 Remember Tom’s “Jump to Conclusions Mat” from the movie Office Space The idea was that 15 the mat would have different conclusions written on it that you could “jump to.” This is a good example of an idea that doesn’t address a need. Why would a person need to literally 16 jump onto a written conclusion Did they have a question If so, are the conclusions even 17 going to be relevant 18 19 After telling his coworkers about his big idea, the character Michael sums it up nicely, “That’s 20 the worst idea I’ve ever heard in my life, Tom.” 21 Think about what need your idea addresses. Your customers have a problem, and you are 22 going to solve it. If you aren’t solving their problems, they aren’t going to buy. Let’s take 23 a day care provider, for example. Child care is a very real need for working parents — they 24 can’t get around it, someone has to watch the kids while they are at work. It’s an absolute 25 necessity. How does your idea solve a problem 26 27 You might have a 28 What’s different about what you offer wonderful business idea, 29 Let’s say you are interested in becoming a child care provider, and we’ll assume that there 30 but before investing too are already a few day care providers in your area. That doesn’t mean you give up, that 31 much time and energy, means you have to set yourself apart. What can you offer that the others aren’t you have to find out if Some customers may not be as concerned with your past experience or specific your potential customers qualifications; they’re concern is with their own needs — in this case, a safe and enriching will bite. environment for their children. Get into your client’s head, or better yet, talk to 25 people who are potential clients and find out what matters most to them. Ask 25 mothers what they want in a day care, and you’ll already be far ahead of your competition. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Is there a market for your product or service 4 5 Is there a market in your area Can your potential customers pay You might want 6 to open a scuba shop, but if you aren’t near a body of water, your geography is off. 7 Similarly, if you want to run a business that specializes in marketing services for non 8 profits, you need to do some real research to find out if your target customer is willing and able to pay. 9 10 11 Are there customers in your area, and can they pay for your services 12 13 Again, this means seeking out people for informational interviews. Use your network, 14 reach out to people, and offer to buy them a cup of coffee for their time. But be sure 15 to make it strictly informational, and refrain from selling them on your idea. Most 16 people are happy to help others, but no one wants to be ambushed by a sales pitch. 17 18 CAUTION: 19 20 Many wouldbe entrepreneurs get caught up 21 doing unimportant tasks that distract them 22 from the real work at hand, which is talking to potential customers. Ramit Sethi of I Will 23 Teach You To Be Rich writes about the perils 24 of spending hours working on a website or 25 setting up a Twitter account. 26 27 “Stop building complex marketing strategies for clients you don’t have...complex 28 marketing strategies like SEO, blogging, and viral marketing appear both easy and 29 discrete, when in reality they’re often an excuse for you to avoid the hard work of finding actual people who will pay you for your services. Complex marketing 30 strategy encompasses dozens of subtasks. Where will you be after subtask 11 In all 31 likelihood, you’ll have given up. Honestly, are you defaulting to highlevel, almost impossibletofinish strategies as a way of avoiding getting down to the real work” Read the full article: “Want to earn more money How to find your first 3 paying clients.” The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 How much are customers willing to pay 8 It’s a good idea to give pricing some thought, but don’t get 9 too caught up in the details when you’re starting to write 10 a plan. Often people spend too much time on the less 11 important aspects of starting a business (“Should I accept 12 Visa or American Express cards‽”) and not enough on the 13 critical parts, like getting customers. 14 When thinking about pricing, decide how you’ll be paid. 15 If you sell a product, you’ll be paid per item. That’s pretty 16 straightforward. If you sell a service, however, you could 17 be paid hourly or by the project, or even paid to be on 18 retainer. When you start a service business, hourly is often 19 a good place to start. It mitigates risk for the customer, 20 and allows you to figure out how much time goes into a service. If you start with a project rate and don’t budget 21 enough time to complete the project, you’re losing money. 22 Once you’ve starting working for a few clients, you’ll have 23 a better idea of what it takes to complete a service, and 24 then you’re better equipped to put together package deals 25 and charge project fees. 26 27 To determine your initial pricing, go with the industry standard in your area. If you want to start a day care, find 28 out what others are charging. This doesn’t mean you have 29 to stay at that price, in fact, you’ll probably want to raise it. 30 After all, you’ve conducted informational interviews with 31 potential clients, and you know what they want. You’ll offer features and benefits that your competition isn’t offering, which means you can charge more. CAUTION: Be careful about charging less than the competition. While that might seem like a good way to draw in customers, you’ll cheapen your value and attract customers who likely value the lowest price above all else. You need customers who are willing to pay for value. contents 1 2 3 4 5 Finances 6 7 8 Without financing squared away, 9 your business can’t afford to get off 10 the ground Let’s dive in deep to Chapter four: 11 figure out how much money you’ll 12 need, and how to get it. 13 14 4 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 contents 1 2 3 4 5 6 How much money do 7 8 you need to get started 9 10 11 First, you need to determine startup costs. How much money will it take to get your business off the ground Make a list of every expense 12 you’ll have for the first six months. Some expenses will be ongoing 13 costs, such as inventory and rent payments, and others will be onetime 14 costs, such as purchasing a piece of equipment. 15 16 After you’ve made a list, decide whether each expense is essential 17 or optional. Cut the optional items from the budget. You can always 18 purchase them later once your business is making a profit. 19 20 Finally, next to the essential expenses, write down whether each 21 expense is fixed or variable. Fixed means that the price won’t change 22 in the foreseeable future, such as rent payments, and variable means 23 the expense will be higher in some months and lower in others, such as inventory (especially if you have a “busy” season) and shipping costs 24 (since shipping costs are determined by how many items you sell). 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 If you’ll need a loan to start your business, you’ll 6 need what’s called debt financing, which is How will you get startup funds 7 borrowing money for a period of time, usually 8 with interest. 9 To prepare to apply for a loan, the Small Business 10 Administration recommends that you gather the 11 following documents: 12 13 • personal background information, including previous addresses, names 14 used, criminal record, and education records 15 • current resume 16 17 • business plan 18 • personal credit report (The lender will obtain your credit report, but you 19 need to request your own personal credit report before applying for a 20 loan to resolve any errors on the report.) 21 22 • business credit report (if you are already in business) 23 • business and personal income tax returns for the previous three years 24 • financial statements (if you’re an owner with more than a 20 percent 25 stake in your business) 26 27 • one year of personal and business bank statements 28 • collateral (Requirements vary greatly – some loan programs don’t 29 require collateral.) 30 31 • legal documents, when applicable, such as business licenses and registrations, articles of incorporation, copies of any contracts with third parties, franchise agreements, and commercial leases Note that requirements will vary depending on the lender and loan program. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 Personal credit 5 6 and business credit 7 8 Many people do not realize that personal credit and business credit are closely tied. Without an 9 established business credit history, lenders will 10 use your personal credit to determine whether or 11 not to lend you money. Evaluating your current 12 financial situation to establish a plan for improving 13 your credit also will improve your chances of being 14 approved for a business loan. 15 Also, realize that many people are turned down 16 the first time they apply for a small business loan. 17 There are a few main reasons people are denied 18 credit, and we’ll examine each one to help you 19 increase your chances of qualifying for a small 20 business loan. 21 22 23 Reason 1: 24 25 Unreasonable purpose 26 for requesting credit 27 28 A lender will want to know that you have a good reason for borrowing money. This is why it’s crucial 29 to have a business plan that will show that your 30 business will fill a need, there’s a market for your 31 product or service, and that you are borrowing money to cover only the essential expenses. Remember, the less money you ask for, the greater your chances of getting approved for the loan. If you are denied a loan because the lender believes your purpose is unreasonable, you’ll need to either cut expenses further or do more legwork to prove that your business idea will be profitable. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 When you dispute a credit report error, both the credit reporting company and the 18 Reason 2: 19 information provider (the company that provided the information to the credit 20 bureau) have a responsibility to correct inaccurate or incomplete information. To 21 dispute an error and get a sample of a credit dispute letter, visit the Federal Trade Errors on applicant’s credit report 22 Commission website and read “How to Dispute Credit Report Errors.” 23 Lenders often require a borrower’s personal guarantee in case of default. This 24 means that your personal credit history will help determine whether or not you 25 are granted a loan, which is especially true for new business owners who don’t 26 have a business credit line to show the lender. Review your credit reports to make sure they are accurate. The Motley Fool offers the following advice 27 on reviewing for errors: All lenders will run a credit check on an applicant, so it’s important to review 28 your report even before you apply for a loan. You get one free credit report “There are two kinds of credit report blunders — information that’s outright inaccurate, and booboos 29 each year from each of the three credit bureaus. You can do this the following that reflect the errors of your ways. Common reporting errors (the notyourfault stuff) can include three ways: 30 accounts mistakenly attributed to you, application notices that you didn’t fill out, and outofdate 31 home address or employment information. Errors can also include omissions, such as the presence 1. Order your reports online at AnnualCreditReport.com of a delinquency that you’ve already remedied, or an old collection action that is still being reported 2. Call 1.877.322.8228 to request your credit reports. as overdue. The other kind of uhoh is the one you brought upon yourself. There’s no denying self inflicted credit record wounds (though you can try, and you might be successful if you catch the credit 3. Complete the Annual Credit Report Request Form and mail it to: reporting agency on a good day).” Annual Credit Report Request Service P.O. Box 105281 Read the full article, “How to Fix Credit BooBoos” on The Motley Fool website. Atlanta, GA 303485281 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 Reason 3: Debt to available credit ratio 10 11 The amount of money you owe makes up about 30 percent of your credit score, so if your credit utilization, or the amount of money you owe in relation to how much credit you have, is high, 12 you might be denied a loan. 13 14 For example, if you have 8,000 of total available credit, but you have 6,000 of debt, you have a debttocredit ratio of 75 percent, which looks risky to lenders. To lower your ratio, take the 15 following steps: 16 17 • Pay down credit card balances and high outstanding debt, rather than moving it around with 18 balance transfers. 19 • Don’t close down credit lines. Owing the same amount but having fewer open accounts raises 20 your credit utilization ratio because you have less credit available to you. 21 • While available credit should be high, don’t open a lot of new credit cards just to increase your 22 available credit. Too much new credit can negatively affect your score, and closing an account 23 doesn’t take the information off your score. 24 25 The bottom line is that there is no easy or shortterm fix. You’ll need to create a budget and put 26 as much money as possible toward paying off debt. Another important thing to know about credit 27 utilization is the following tip from The Consumerist: 28 “An important and often misunderstood aspect of credit utilization is that it doesn’t matter if you 29 carry a balance or pay off your entire balance every month, it’s just the ratio of credit used to 30 credit available. It also doesn’t matter how large your balances or limits are on their own. Only 31 the percentage used is important for this metric.” In other words, if you have 1,000 of total credit, and you charge 500 on a credit card each month and pay off the balance in full, you’re ratio will still be 50 percent, which looks risky to lenders. Aim for less than 30 percent — the lower, the better. Also, don’t open a bunch of new credit lines to try to increase your available credit. Too much new credit in a short period of time will lower your score. Instead, reduce how much you charge each month. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 Paying off debt: Start here 8 9 To get started on the road to debtfree living, J.D. Roth of Get Rich 10 Slowly offers three concrete steps: 11 12 Stop acquiring new debt. Cut up your cards, freeze them, 13 1 hide them under the mattress whatever you do, stop 14 adding to your debt. 15 16 Establish an emergency fund. Roth writes, “For some, this 2 17 is counterintuitive. Why save before paying off debt 18 Because if you don’t save first, you’re not going to be 19 able to cope with unexpected expenses.” An emergency fund is your insurance against acquiring more debt. If 20 you handle your financial emergencies with a credit card, 21 you’ll never be debtfree. A small cash cushion of 500 22 1,000 will let you selfinsure against emergencies, with 23 0 percent interest. 24 25 Implement a debt snowball. List your debts from lowest 3 to highest balance, and put as much money as possible 26 toward the one with the lowest balance while paying the 27 minimum on the others. Once the first debt is paid off, 28 continue the process with the second lowest balance until 29 you’re debtfree. 30 31 Roth writes, “The most important thing is to start now. Don’t start tomorrow. Don’t start next week. Start tackling your debt now. Your older self will thank you.” Read the full article, “How to Get Out of Debt,” for frank advice on how to stop acquiring debt and pay off the debt you currently carry. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Reason 4: Bad credit history 4 If you have several marks against you on your credit report, you need to start building a good 5 credit history before you will be able to qualify for a small business loan. Payment history 6 makes up 35 percent of your credit score, so it’s crucial to begin creating good history as soon 7 as possible. 8 To improve your score when you have a bad credit history, take the following steps: 9 Pay your bills on time. Late payments and bills that go to collections harm your score. 10 11 If you’re behind on payments, call your creditors and work out a plan to get and keep your account current. 12 13 If you’re overwhelmed by debt, contact a legitimate credit counselor, preferably one 14 affiliated with the National Foundation for Credit Counseling such as Money Management International for counseling services. 15 16 17 18 19 20 21 Don’t underestimate how much late 22 payments can harm your score. In “The 23 Real Impact of Late Payments” Motley 24 Fool writer Dayana Yochim reports, 25 “A single threemonth late payment 26 on your report will cause longterm 27 damage to your credit score...a single 28 90day late payment is as damaging as 29 a bankruptcy filing, a tax lien, a collec 30 tion, a judgment, or a repossession. It 31 doesn’t matter if you’re late paying a 50 bill or a 5,000 one...” The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Five ways to pay on time 4 5 6 Not only does paying bills late affect your credit score, it also costs 7 you in late fees and other penalties. If you have the cash to pay, but 8 you’re still chronically late, consider the following methods to get 9 your bills paid on time: 10 11 Read the payment instructions. If you forget to include your 1 12 account number on the check or pay on a holiday, the payment 13 might not be processed by the due date. 14 15 Pay the minimum. Even if you can’t pay the full balance, at least 2 16 pay the minimum to keep the account in good standing. 17 18 Automate payments. Today you can sign up for automatic 3 19 payments for most bills, including utilities, credit cards, and more. 20 The accounts are linked to your credit card or checking account, and the bill is automatically paid before or on the due date. 21 22 Batch your bills. Switch the due dates for all of your bills so that 23 4 they all on the same day or a range of a few days. That way you’ll 24 only have to pay bills once a month, and you won’t run the risk of 25 spending your paycheck and forgetting that the electric bill hasn’t 26 been paid. 27 28 Use online alerts. Personal finance applications like MyCheckFree, 5 29 Pageonce, and Mint will alert you to upcoming bill due dates. 30 31 It’s important to understand that paying off a credit account will not remove the history from your credit report it stays on your report for seven years. Nevertheless, both good history and bad history count toward calculating your score, so the longer you build good history by paying your bills on time, the higher your score will go. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Reason 5: No credit history As with most credit score fixes, shortterm solutions don’t exist, 20 and trying to fix your score quickly usually results in negative 21 consequences. Your best bet is to pay off debt, pay bills on time, 22 If you haven’t been using credit for very long, you might not have a long enough and monitor your credit report for errors. As the bad history ages, 23 credit history to satisfy lenders. This is another reason to not close lines of credit. it will count against you less and less, eventually dropping off your Not only will that raise your credit utilization, but you might be shortening your 24 credit history if the accounts have been open for a longer time. report completely after seven years, leaving only the good history 25 and upping your score. 26 The following are tips for improving your score when you don’t have a long enough credit history: 27 28 • Don’t open a lot of new accounts. Too many new accounts will lower your average 29 account age, which will have a greater negative affect on your score since you don’t have a lot of other credit information in the mix. It also looks risky to lenders 30 if you are fairly new to using credit. 31 • Apply for and open new credit accounts only as needed. Having a credit card will help your score, but only if you manage it responsibly. • Generally, someone with no credit cards is a higher risk to lenders than someone who has managed credit cards responsibly. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 Chapter five: business structure and taxes 4 5 6 7 8 Chapter five: 9 income tax 10 11 12 13 14 15 16 17 structure tax for employers 18 5 19 20 21 22 23 24 excise taxes selfemployment tax 25 26 27 28 29 30 31 partnership sole proprietor corporation liability contents 1 2 Business structure and taxes 3 4 Paying taxes isn’t the most exciting part of starting a business, but it’s an essential 5 consideration. Nevertheless, don’t get too caught up in the details until you’ve worked 6 on your business plan, met with potential customers, and secured financing for startup 7 costs. Those are critical first steps, so don’t get ahead of yourself. 8 If you think you’re ready, check out the Small Business Association’s Starting Up 9 Assessment Tool to help you better understand if you’re ready to start a small business. 10 The tool is simple to use, takes less than five minutes to complete, and will help you 11 evaluate skills, characteristics, and experience as they relate to your business. Once 12 complete, you will be given a score that will be used to develop your assessment 13 profile and a statement of suggested next steps that will direct you to appropriate SBA 14 resources to improve your preparedness. 15 When all signs point to go, it’s time to learn about business structure and taxes. 16 17 18 Business structure 19 The type of business structure you establish determines which income tax return form 20 you’ll file. The federal government levies four main types of business taxes: 21 22 • income tax 23 • selfemployment tax • taxes for employers 24 • excise taxes 25 26 27 You can learn more about each of these taxes by visiting the U.S. Internal Revenue 28 Service’s (IRS) Small Business and SelfEmployed Tax Center. 29 Businesses are classified into the following structures or entities: 30 31 • sole proprietorship • partnership • corporation • S corporation • Limited Liability Company (LLC) The most common types for small business owners are sole proprietorship, partnership, and LLCs. You can learn more about the federal income tax requirements for each by visiting the U.S. Internal Revenue Service’s (IRS) Business Structures guide. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 10 11 12 State income taxes 13 14 Nearly every state levies a business tax. Similar 15 to federal taxes, your state tax requirements will 16 depend on the legal structure of your business. 17 The Small Business Administration provides a 18 collection of links to state government resources 19 with useful information for businesses, including taxation, links for employers, forms, insurance, 20 and more. 21 22 23 24 25 26 27 28 29 30 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 Starting a business requires a lot of work, and you’ll probably have a lot 2 of questions along the way. Keep the following resources close at hand 3 to refer to as you work towards your small business goals. To learn more 4 Additional Resources about available small business resources, complete this short survey. 5 6 7 10 Free (Or Cheap) Tools for StartUps – Inc.com provides a review of 10 low or nocost tools 8 for new business owners, including solutions for packaging, shipping, phone systems, mail, 9 documents, remote employees, file backup, and more. 10 Bplants.com – More than 100 free samples of business plans, plus articles, tips, and tools to help 11 you develop your own plan. 12 13 IRS Small Business and SelfEmployed Tax Center – The IRS gathered all forms, news, and tax 14 information for small business owners to get answers to their tax questions. Download multiple 15 small business and selfemployed forms and publications; learn about federal income tax, Social 16 Security and Medicare taxes, and selfemployment tax; read about important tax information 17 related to the various stages of owning a business; and more. 18 Money Management International – Money Management International is a nonprofit, full 19 service credit counseling agency, providing financial guidance, credit counseling, community 20 wide educational programs, debt management assistance, bankruptcy counseling and education 21 services, and housing counseling assistance to consumers via phone, Internet, and inperson 22 sessions. MMI offers free financial resources for small business owners such as webinars and 23 budget and debt counseling. They also offer an Earn More financial education section with a wealth of information helpful for entrepreneurs. 24 25 SCORE – SCORE, mentors to America’s small business, is a nonprofit association dedicated to 26 educating entrepreneurs and helping small business start, grow, and succeed nationwide. SCORE 27 is a resource partner with the SBA and offers free and confidential small business advice for 28 entrepreneurs, online and inperson at one of their 364 offices. 29 The U.S. Small Business Administration – The U.S. Small Business Administration (SBA) dedicates 30 its energy and resources to providing support to small businesses and smallbusiness owners 31 across the nation. You’ll find resources, forms, counseling, training, and more on virtually every aspect of starting and running a business. WomanOwned – WomanOwned provides online business information and networking assistance, as well as a number of resources for setting up, running, and growing a business. The site includes an online search engine of women business owners from every type of industry and from almost every country around the world. The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 9 10 11 12 13 This eBook is being provided for informational 14 purposes only. It should not be used as a substitute 15 for legal or tax advice. The financial experts at Money Management International are trained in personal finance, 16 but are not certified financial advisors or tax professionals. 17 18 19 20 21 22 Source Acknowledgements 23 The Wall Street Journal: Complete Small Business Guidebook, Colleen DeBaise 24 Startup Nation: Open for Business, Jeff and Rich Sloan 25 How to Write a Great Business Plan, INC.com 26 I Will Teach You to Be Rich, Ramit Sethi 27 How to Fix Credit BooBoos, MotleyFool.com 28 Understanding Credit Utilization, Consumerist.com 29 Get Rich Slowly, J.D. Roth 30 The Real Impact of Late Payments, MotleyFool.com 31 The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents 1 2 3 4 5 6 7 8 About Money Management International 9 10 Money Management International (MMI) is dedicated to improving lives through financial education. 11 12 As the largest, nonprofit, full service credit counseling organization in the 13 nation, we develop materials over a wide range of topics to help you 14 make the most of your money. 15 16 We also provide professional financial guidance, credit counseling, communitywide educational programs, debt management assistance, 17 bankruptcy counseling and educational services, and housing counseling 18 assistance to consumers via phone, Internet, and inperson sessions. 19 20 21 Let’s keep in touch 22 23 Visit us on the Web at MoneyManagement.org 24 Become a fan of MMI on Facebook 25 Follow MMI on Twitter 26 Follow MMI on YouTube 27 Find financial inspiration at Blogging for Change 28 29 Check out free eBooks from MMI Library: 30 Cheap Eats: CheapEats.MoneyManagement.org 31 Tips For Change: TipsForChange.MoneyManagement.org Thrifty Thanksgiving: Thanksgiving.MoneyManagement.org Love and Money: Love.MoneyManagement.org Financial Literacy: FinancialLiteracyMonth.MoneyManagement.org The Entrepreneur’s Guide to Personal Finance – an eBook from Money Mangement International MoneyManagement.org Copyright 2011 Money Management International, Inc. contents
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