Curious about investing your personal money in your business? Discover the advantages and potential pitfalls in this comprehensive guide. Explore the pros and cons of using your own funds to start or grow your business and make an informed decision on whether it’s the right approach for you. This double-edged sword can provide great opportunities, but it’s essential to understand the risks as well. Read now and become an informed investor!
Discover the advantages and potential pitfalls of using your own funds to start or grow your business. Learn why putting personal money into a business can be a double-edged sword. This comprehensive guide explores the pros and cons of investing personal money in your business, helping you make an informed decision on whether it’s the right approach for you.
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Dear Business Banter,
Im trying to start a business—I make organic soy candles. But Im having an issue with funding. Im thinking of just putting up my own money in order to start up the business. Do you think this is a good idea? — Amanda
Dear Amanda,
Congratulations on taking that next step toward entrepreneurship! While investing in your fledgling business with your own money can be tempting, there are pros and cons to doing so.
Have a business question for Erica? Drop her a line at the Ask Bankrate Experts page.
Pros of using your own money
There is something to be said for investing your own hard-earned cash into your business. Most notable is that you will be highly vested in the outcome. The last thing you want to do is lose money that youve worked so hard to make and made sacrifices to save.
Using your personal funds can give you the passion necessary to overcome the obstacles that are common with small businesses. Because so much is at stake, you might wake up early in the morning and work later into the night than you would if you were just relying on a banks funds.
In fact, its a similar concept to a mortgage lender expecting a homebuyer to put down at least 20% as a down payment. The more money the buyer has invested into the home, the less likely she is to walk away from the obligation should times get tough.
Another positive asset of using your own cash is that you wont be charged interest. Financing fees that come with installment loans and credit card debt that you carry over from month to month eat into precious revenue. When you use your own money, you dont have that problem.
But, while it is a wise idea to put at least some of your personal savings into your company, it comes with some caveats.
Cons of using your own money
Over-relying on your own cash
Doing this can put you and your company in a bind. Unless you have especially deep pockets, its more than likely that you will not have enough money to move beyond the launch—if you even get that far. New entrepreneurs are often caught off guard with unexpected expenses.
Blowing through too much cash in the beginning
Eventually, you may want to apply for a business loan or business line of credit. If you do, the lender will most likely want to see that you have some assets in the bank.
Property such as cars and real estate is good, but money held in savings, money market or brokerage accounts, treasuries or certificates of deposits is better.
If you dont have anything that can act as security, you could be out of luck for the banks assistance when you really need it. That situation will put plans for your venture in peril.
No credit history or credit score
A downside to only using cash is that you wont be creating an attractive credit history. Without borrowing from a creditor that furnishes the three major credit reporting agencies (Equifax, TransUnion and Experian) with information, your credit file will be blank.
That also means a credit score will not be developed because there is no data to input into a mathematical risk model. Therefore, while you may be sure that youre a low-credit risk borrower, other lenders and businesses wont have such confidence.
No perks or rewards
A tremendous advantage of using small-business credit cards is that they come with rewards programs that are specially developed for the needs of a small-business owner.
For example, if you were to get a credit card that comes with 0% APR for 12 months, youd have a year to use the card issuers money to buy such things as products for your candles, packaging and shipping without any finance fees being added to the debt (as long as you made your payments on time and then delete any balance before the promotional rate ends).
You could accumulate cash, points or miles with almost every purchase, as well as potentially a large amount when you open the card and spend a minimum amount in the first few months. Most of these cards have excellent accounting features, too, which will help you track your costs and prepare your taxes.
What you should do
The best course of action is to do a little of both. Assess how much money you are willing and able to put into your business. You should always have some liquid funds in a bank account that will serve both as secured assets in case you do want to take out a loan. It will also act as emergency funds in the event you need to tap into the account for something important when borrowing isnt a good option.
Take this time to build your creditworthiness to overcome your current funding troubles. Pull your credit reports from AnnualCreditReports.com and obtain your credit scores (the most commonly used are FICO scores, and you can get them from myfico.com).
Payment history is most important to lenders, so your scores may be low if you missed some payments, especially if the delinquencies are recent or severe (more than 30-days late). Although you cant remove them before they drop off in seven years, get all future payments in on time. If you have credit cards and the debt is high in relation to the amount you can charge, youll want to pay the balance down so your credit utilization ratio opens up.
See related: Best secured business credit cards for 2020
If youre just starting out with credit and have nothing thats being reported, consider a credit builder loan. These products are often available from credit unions. The way they work is you take out a small loan, but instead of receiving cash, the money goes into a secured savings account or certificate of deposit.
You would repay the loan in equal installments, usually from between six to 24 months. As you do, the lender sends your activity to the credit reporting agencies, thus establishing a great credit history! After the loan is fully repaid, you get the money, so it also is a savings vehicle. And depending on the lender, some or all of the interest you paid will be returned to you.
So, what does that leave you with? More cash for your business endeavors and a credit report thats filled with excellent information!
investing personal money in your business
