Start Your Own Biz | How to Calculate Your Net Worth and Degree of Debt

Unlike yesterday's worksheet that focused on your business costs, today we're analysing your net worth and degree of debt. Sometimes known as a personal balance sheet, this calculation will help you determine whether your business - but actually, you - are eligible for funding, or not.

This is Part 10 in an 11-part series on How to Start Your Own Business.

What You Need to Apply for a Business Loan

That's just a list of what you could be called on to produce when applying for a business loan. Depending on where you apply for that loan, you may only need some of the evidence. The table above is just to give you an idea of what to expect, especially since a balance sheet is one of the requirements.

Now that you know why this step in starting a business is so important, let's move on.

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What is Your Net Worth?

Your net worth is - quite literally - what you are worth on a piece of paper that details your financial standing. It is the sum of your assets minus the sum of your liabilities.

How Your Net Worth Impacts Starting a Business

First up, you need cash and liquid assets, but there's no point in selling everything you've got and flipping your assets like mad, just to start a business.

Not only is this a very 'Elon Musk' kind of move, but it's also risky and severely downgrades your net worth. That's why you'll need funding to start your business.

Having a good credit score and low debt helps you qualify for small business loans or financing. High debt and a poor credit rating makes getting funding for your business very difficult.

While banks may need a credit score of 670+, some online lenders will only need a score of 500+. There are a host of other risks to think about in online lending, so don't just jump at the first lender that doesn't mind your credit rating. Do your homework.

RECOMMENDED READING: Get your FREE credit score rating here: Experien

Banks and lenders often require collateral like homes or investments to secure loans. A higher net worth provides you with more potential collateral to present as financial evidence that you're worth risking. It also gives you more of a financial cushion to take the risk of starting your own business.

If you find that your net worth is lower than you thought it would be, or that your degree of debt - when looked at in a bigger picture - is also higher than anticipated, take heart.

You can still start a successful businesses with proper planning, forming sound partnerships, looking at secure (not risky) financing, and by avoiding excessive financial risk.

What is Your Degree of Debt?

Your degree of debt is determined when your total liabilities exceed your total assets. It is the sum of your liabilities minus the sum of your assets.

How Your Degree of Debt Impacts Starting a Business

The more personal and business debt you have, the harder it becomes to start a new business. Loans and unpaid balances reduce how much capital you can invest, while high debt also hurts your credit score, making it difficult to qualify for financing.

Banks view heavy debt as a major risk. While some debt may be unavoidable, having too many liabilities can strain your cash flow.

Consider paying down your loans, credit cards, and any other financial obligations before starting your company.

Prioritize minimizing these obligations so your debt repayments don't eat up all your working capital, which you're going to need in the critical early stages of starting your business.

Consider paying down your loans, credit cards, and any other financial obligations before starting your company. I know this is not what you want to hear, but you simply cannot place yourself underwater to start your business, then spend the next five years drowning.

That's not a plan; that's suicide. Not only will your mental health take a nose dive, but your physical health will deteriorate rapidly from all the stress, too. You won't have the energy, motivation, or money to run your business.

How to Calculate Your Net Worth and Degree of Debt

Use my template to list your assets and liabilities in an easy-to-read format. Download your FREE copy here or by clicking the image below:

The final instalment in this series contains another FREE handout: The Marketing Must-Have Planning Checklist.

Join us as we wrap up the series and move on to How to Get Your Business Online in 2024, a 20-part series with specific tips and tricks for each social media platform, blogging fundamentals, SEO best practices, creating a website wireframe, what costs to budget for, and more.

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