Watch out for debt when starting up a business
As we launch into 2021, business commentators indicate there is enthusiasm in New Zealand for people to start their own enterprises despite uncertainty resulting from Covid-19.
Aotearoa is relatively deregulated and budding entrepreneurs can start a venture without prior experience or any money in the bank, which means the sky is the limit for both success and failure. About the only restriction is that if a person is currently bankrupt they cannot run a business without the permission of the Official Assignee.
So, here is a big heads up.
If you have a brilliant money-making idea but you don’t know what you are doing, make sure you get some good financial advice and support before you start a business.
Some business debts that can sneak up on you:
Tax: The Inland Revenue is kind to businesses when they first start up and you can take up to a year to pay your first tax bill. However, there is also an option to receive a 6.7 per cent discount if you pay your tax earlier if this is feasible with your cash flow.
Some tax must be paid on time, such as PAYE if you employ people and withholding tax if you use subcontractors.
Accountancy fees: If you are running a business you should budget for accounting fees or at the very least bookkeeping fees, unless you are very certain you know what you are doing when filing tax returns.
ACC: As soon as you file a tax return you should expect an account from ACC. Currently, you could expect this to be a minimum of $520 (+GST) even if your business runs at a loss. Have a look at the ACC Levy Guidebook.
Wages: Paying your staff and subcontractors should always be a priority and yet many business owners keep employees waiting when the going gets tough. Not paying staff on time causes anxiety and financial hardship for them and inevitably, you will lose vital employees and contractors and could expect a call from the Employment Relations Authority, Employment Court or Disputes Tribunal.
Rent: If you rent the premises where your business is based, missed payments can become a problem debt, especially when a long-term lease is agreed upon and business is not booming. If you start up a home-based business and live in a rented house, you need to meet your payment obligations and also, check your tenancy agreement and insurance. It may not be appropriate to operate an enterprise from your residence.
Personal credit card: Using credit cards is expensive, with interest rates ranging from 12.9 to 26 per cent, as at January 2021. Also, messy bookkeeping practices when using a personal credit card for business purchases can lead to expenditure not being correctly attributed to the business. A debit card is a much better option for businesses and then you can only spend what is in the bank account.
Bank loans for businesses
Small businesses can apply to borrow from mainstream banks as well as online higher-interest lenders. Business loan interest rates from mainstream lenders range from 12 to 43 per cent. See Interest.co.nz for current rates.
Watch out for organisations that promise to free up cash flow by lending against outstanding invoices as they tend to have extremely high interest rates.
The Covid-19 Small Business Cashflow (Loan) Scheme is only applicable for businesses that were eligible for the original wage subsidy scheme, which were already in business before Covid restrictions were introduced in New Zealand.
Personal debt impact on business and business debt impact on personal life
Running a business does not mean you can easily separate your personal financial situation from the financial performance of your business.
When your business applies for a loan the creditor will want to know everything about your personal money and debt.
A poor personal credit score and defaulted debts will impact on your ability to borrow for your business.
Also, if you run your own business and you want to borrow for a mortgage to buy a home or enter a hire purchase agreement to get a new TV, the lender will want to know your income details.
This can be erratic when you run a business, well beyond the first few years.
Get advice
Probably the biggest thing all entrepreneurs learn is to be openminded to suggestions from others and before starting a business or entering a debt contract, get some advice.
Sometimes it is simply a matter of reviewing your budget, allowing time to pay off debts and then being patient as your business plan develops.