I went out for a drink with a former colleague just before Christmas. She shared with me a tale of woe about how the company she still works for, that I did some work with a while back, was going nowhere fast. Essentially, she wanted to pick my brain about starting her own business and has seen me do it, a conversation I will always welcome!
Now, let’s play fair here. I finished my contract with said company and left on very good terms, so I shall neither name them nor divulge the industry. However, whilst there I was party to a few conversations among certain senior figures pertaining to their increasing debt to equity ratio; rarely a good sign, in my opinion, although not my place to judge.
Now whilst I did not share that information, she did share her idea, and vision and I must say I was intrigued. She mentioned that her credit score was good and, despite not being a homeowner, felt comfortable about raising finance to commence as she had an in-principle agreement with her first client.
“Whoah, horsey”! Said I. What happens if the goalposts are moved and/or this agreement does not come to fruition for whatever reason? What’s plan B? What level of stability are you aiming for and in what timescale? Apart from asking me what scalability referred to, she then also said that if she is a limited company then it’s OK as if the worse came to the worst, the debts would stay with the company and not affect her! “Whoah, horsey”! Said I.
I was stunned, suggested having a read about directors’ loan accounts, and, more importantly, insisted on seeking out some formal advice from a trained professional! Particularly if her funding source demands a personal guarantee.
What I did impair though was a little common sense, based on my own experience. I asked her how long it would take for the first invoice to clear and how much she would need to get by every month. In my own example, I saved £4k. This provided me with £1k per month which allowed me to eat, just about pay my overheads, and get around.
You also must make sacrifices. You can put a pin in that week in Ibiza and maybe that new car can go on hold for a little while longer. I had to miss a stag do in Vegas and a cup semi-final, but it was worth it.
Don’t get me wrong by the way, I think she’ll absolutely crush it. With her ideas, drive, and motivation; I do not see why she would not succeed in a short space of time. My point here is to become aware and prepare for what could happen; to cover your back, basically. Failure to prepare is preparing to fail after all.
Do not build your business on debt. It’s like a game of Risk - rolling with 2 dice when your opponent rolls 3.
