Ask the expert: How do you pay the mortgage?

  • Updated: January 25, 2009 - 10:35 PM

Q When starting your own business, where or how do you get the money not necessarily to pay a salary, but to take care of necessities and bills such as your mortgage? Is it something to factor into your loan amount, or should you plan on having enough in personal savings to cover these types of expenses?

B.W.

A Pulling cash out of a business to "take care of necessities" is really the same as paying yourself a salary. And usually lenders take a dim view of doing that with "their" money.

That is why early stage funding of a business usually comes from personal savings, credit cards or by keeping your day job until the business gets on its feet.

Even when the economy is very strong, it is difficult to obtain bank financing to start a business. First of all, start-ups have no operating history that demonstrates an ability to repay the loan. The current economic situation also had led many banks to tighten their lending practices. Finally, declining real estate values have choked off home equity as a source of start-up cash.

Bankers may be more inclined to lend if you are using the loan to purchase specific assets such as real estate or equipment with significant collateral value, or if you can identify another stream of income such as outside employment or a spouse's job. But you still will have to put up a significant amount of your own cash and personally guarantee the debt.

As a business owner, you stand at the end of the line to be paid behind your employees, vendors and creditors. When business is good, getting the leftovers can be very lucrative. But when business is tough, it is important to have some savings or other income to take care of personal expenses.

MIKE RYAN, DIRECTOR,

SMALL BUSINESS DEVELOPMENT CENTER,

UNIVERSITY OF ST. THOMAS

OPUS COLLEGE OF BUSINESS

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