Let’s say you went $100,000 in debt starting a business, and it costs $5000 to operate every month and you make only $4000 every month for the first year.
But you have a house and family, etc.
Where is the money going/ coming from??
In: Economics
Where the question has a bad assumption is that most smart business owners pay themselves *before* they pay other stuff. What this means is the “salary” of the business owner is the most important “operating expense”.
So your analysis which places that out of proper order isn’t really a good example.
Something more realistic, let’s assume in a service industry that doesn’t require massive investment in inventory, is:
* You float a loan for $100K to start your business. If your income was only expected to be $4k a month, ***you’d never get the loan***. So you can prove you’ll make $15K a month through your business case, and you have collateral such as equity on a house, and so you can actually get a loan.
* Your business has an income of, say, $15K a month. (That’s only $500 a day in revenue).
* Of that, you immediately take $4K from that monthly income as your own “salary”. You have $11k left. IT COMES OFF FIRST because you yourself are an “operating expense”.
* You then pay $5k of operating expenses for the rest. You have $6K left.
* You pay some of that, say $3K, toward servicing your debt. You have $3K left.
* Then there’s taxes, and however they work into the mix if applicable.
* **NOW THE ANSWER TO YOUR QUESTION:** If the total above is over $15K a month, you’re a business that is LOSING MONEY but your business can still survive a long time. You might have to reschedule a longer loan payment, or make some compromises on operating expenses. You could do some work “under the table” to avoid business taxes and not declare some of its income. There’s other tricks, as long as it doesn’t lose TOO MUCH money in too many months in a row.
* Anything left after that can get invested into the business to help grow and promote it, or you can take it yourself, or you can expand your stock…. whatever. That’s your cushion.
Your initial numbers don’t make a case for a business that could ever get a start-up loan.
Latest Answers