It’s time to help another PDITF reader out. Jane sent me an email. It says…
You’re all about debt reduction and I can get on board with that, but we (hubby and I) are contemplating getting into business for ourselves. Would this be acceptable debt (in your eyes)?? We’re looking at possibly $50k with the potential to recoup in the first year (or two if we actually want a salary in that first year, which is what I’m leaning towards). We DO have some savings, but that would leave us with NO emergency fund (and me, VERY uncomfortable).
So do I think taking on debt to start a business is a good move? Not knowing all of the details (interest rate on loan, type of business, success of similar companies, amount in savings, annual income, etc) it’s hard to give Jane a completely detailed response, but I’m gonna do my best….
Jane, DON’T FREAKIN DO IT! In fact, I’d rather squirt lemon juice in my eyes than start a business with credit. Why you ask?
Well according to the U.S. Small Business Administration, three out of ten new businesses fail within two years, and only half survive five years. If you could cash flow the business, I’d say go for it. But financing a business that is just as likely to fail as succeed, is no bueno in my opinion.
Honestly, I think Jane answered her question with the information she provided in her last sentence. By starting a new business she would deplete what little savings she has, she would have NO cash in the event of an emergency, and she would be the proud new owner of a crapload of debt. There is no way I can, in good conscience, recommend she put herself in such a stressful situation.
Obviously I don’t know what type of business she is looking to start. If it’s going to be the next Microsoft or Facebook, then she should probably ignore my advice and take on the debt. But let’s be real, the chances of that happening are the same chances that Ricky Martin was ever straight.
Here’s my advice Jane: Keep working hard. Save up as much money as you can. Build your business slowly. And pay cash as you go. If you do this, you’ll have a lot less stress and a ton more freedom when it comes time to open your business. And if said business does in fact fail, you at least can walk away with no financial obligations. I couldn’t imagine a worse feeling than being $50K in debt, 3 years out of the workforce, and have NOTHING to show for it.
So PDITFers what’s your recommendation to Jane? Would you ever take on debt to finance a business? Is it too risky? Anyone out there think she should go for it? Help a sista out!