Finance & Grow Your New Business. Angie Mohr

North America, almost every person who has ever borrowed money from an institution will have a credit report on file with one of the major credit bureaus. This report will have your borrowing and employment history, including amounts owing, how quickly you have repaid past loans, whether any payments are overdue, and whether a lender has ever had to turn any of your debt over to a collection agency in the past. Any past bankruptcies will also show up on this report. This information culminates in your credit score, which is used by lenders to predict whether or not you are a good credit risk. Having a poor score can not only ensure that you are denied future credit but you may also have to pay a much higher interest rate to offset what the lender perceives as your increased risk.

      You have a right to have access to your own credit reports and it is highly recommended that you review it on a regular basis, as often as yearly. It’s important for you to know how a future lender will view you. There is also the possibility that your credit report contains inaccurate information, which you should have corrected as soon as possible to avoid it impacting your credit-worthiness.

      Your personal credit history will also come into play when you start your small business. Most banks and leasing companies will check your personal credit score to make sure that you pay both your personal and business debts on time. This will matter greatly when you apply for a business line of credit or for a lease arrangement for your equipment.

      Make sure your personal credit history is as clean and in order as possible before you contemplate starting your business. It will save you many headaches down the road.

      In the United States, there are three national credit reporting agencies for individuals and it is important to see your credit information from all three:

      • Equifax: www.equifax.com

      • TransUnion: www.transunion.com

      • Experian: www.experian.com

      In Canada, there are two national reporting agencies:

      • Equifax: www.equifax.com

      • TransUnion: www.tuc.ca

      Insuring Your Assets

      Insurance isn’t a topic that many people give much thought to. But it goes hand-in-hand with our discussion about risk. In its most simple terms, insurance (for a fee) protects us against the risk of losing our assets. As a small-business owner, having adequate insurance will become vitally important. Let’s have a look at the major categories of insurance that you should consider.

      Life insurance

      What will happen when you die? Basically, anyone who is dependent upon you bringing in income will no longer have that source of income. This will be especially important if you have a spouse and children. The family home must still be maintained and the children’s education accounts must still be funded. It may be impossible for your spouse to carry the burden alone when you are gone. If this is the case, it’s imperative that you have life insurance to replace your lost income, at least until the children are grown and self-sufficient. If, however, you are single and have no other dependents, life insurance is not a necessity and the premiums that you would otherwise pay might be better off in an investment account.

      There are many types of life insurance, some of which have an investment component to them. A discussion of the options available is beyond the scope of this book and should be discussed with your accountant or independent financial adviser.

      How much life insurance do you need? You should be able to review your current spending budget and compare it to the after-tax income of your spouse (remember that he or she will most likely keep working). The shortfall between the expenses and the income will need to be funded through life insurance. Another alternative is to insure for the amount of your debts, including your mortgage. Then, upon your death, your spouse will only have to pay ongoing living expenses and not have any debt payments.

      Mortgage insurance

      Mortgage insurance will pay off the outstanding balance of your mortgage when you die. However, the premiums for most policies are set based on the amount owing when the policy is set up. So, for example, you may owe $150,000 now on your mortgage and will pay premiums based on that. In ten years, when you die, you may only owe $10,000 and that would be the amount paid out on the policy. In general, the premiums for mortgage insurance tend to be high compared to the payout. Mortgage insurance can be replaced with additional life insurance for a much lower cost in many cases, and should be discussed with your accountant or independent financial planner.

      Property and casualty insurance

      This type of insurance protects you from the loss of your belongings, such as your house and its contents, your car, and any other physical assets you may have. Many property and casualty policies also contain a liability component, so that, for example, if someone slips on the ice and breaks a leg on your front steps, your insurance will pay.

      Your insurance company will have standards as to how much insurance they will provide based on their assessed market value of your assets. You should ensure, though, that what will be paid out in insurance will at least cover any debt secured by that asset. For example, let’s say you have a car on which you are making monthly payments. The insured value of the car is $6,000 but you still owe $7,500 on it. If the car is totaled, the financing company will immediately call the loan and you will have to dig up the excess $1,500 from somewhere to cover it.

      When assessing whether your belongings are adequately covered by property and casualty insurance, make sure that you have considered any special collections you might own, such as stamps, art, hockey cards, or antiques. These types of assets are generally not covered under the standard policy and you may have to take out a special rider on them.

      Health insurance

      Health insurance is one area in which the majority of people are under-insured. It may be tempting to just assume that you will be healthy until you retire, but that is dangerous thinking. If your health fails, your ability to earn income may disappear, along with your plans for retirement.

      As a small-business owner, health insurance is essential as you will not be able to rely on any employer- or government-funded health plans. There are two major coverages that you need to consider. The first is that you will not have your income any longer. As a small-business owner, you will have to hire someone to do the work that you once did or you may even have to close the doors, but either way, you will have to replace your former income. The second is that you may have ongoing medical and long-term care expenses in the future. For example, you may have to hire a private care nurse to attend to your medical needs.

      There are many forms of health insurance. Some include coverage for drugs and dental expenses, some pay out a lump sum when you are diagnosed with a critical illness, and some provide ongoing payments for your lifetime. Discuss coverage with your financial adviser or insurance specialist to make sure that you will be able to continue to meet your personal and business financial goals in the event of serious illness.

      Chapter Summary

      • Before you jump into the role of business owner, it’s important to first get your personal finances in shape.

      • Reviewing your personal financial and retirement goals will help when you plan your business to ensure that all of your goals are in alignment.

      • Getting your personal debt under control will help with your borrowing capacity in your business and will help you to manage your business debt more effectively.

      • Having adequate insurance on all of your assets will help you to financially weather any catastrophic event.

      5

      Setting Your Business Goals