More and more business owners are personally financing their businesses. For those looking to self-finance, we—with some backup from small biz experts Stephen Key and Emily Chase Smith—want to share some pros and cons to keep in mind when using your personal funds to run your business.
Pro: You Will Run a Better Business
“If you’ve got your own money on the line, you’re going to look at your business very differently,” says Stephen Key, author of One Simple Idea for Startups and Entrepreneurs. You’re going to want to really do your due diligence to make sure you can minimize the risk of losing your money. “You’re going to plan differently,” says Key. “It becomes all about planning, all about homework, and all about having a solid business plan.” You will run a smarter and better company as a result. And all the rewards will be yours, not the bank’s.
Con: The Risk of Personal Debt and Bankruptcy
When we think of small biz owners using personal funds, we tend to think of retirement accounts or savings nest eggs. But many also use personal credits card or line of credits. That’s where Emily Chase Smith, author of The Financially Savvy Entrepreneur, says many entrepreneurs get in trouble. “A lot of small business owners are taking on debt on the personal side. Let’s say they’re taking on a line of credit for their business with the bank. They have to then personally guarantee that money,” says Smith. What’s the risk of that? “If the business goes under, then the entrepreneur will either spend the next decade paying it off on the personal side, or need to file for personal bankruptcy.” Those are two undesirable outcomes you need to be sure you can live with.
Con: Your Money Might Not Be Enough
Strangely, one of the worst things that can happen to a self-financed entrepreneur? Success. Say you used $10,000 of savings to start your company and develop a product. Suddenly Target wants to place a gigantic order. You now have to deliver that order. And you won’t see any money from it until 90 days after delivery. Guess what? You can’t afford to give Target what they want.
This is why Key cautions, “If you’re going to be successful, you’re going to need a lot of capital. The whole dilemma of cash flow comes up real quick,” says Key. A bank loan can give you more financial room for potential success. A dip into your savings could see your quick start meet a quick dead end. Smith drives that point home very clearly: “You could have the world’s best business idea, you can be smart, you can be a serious hustler, but if you run out of cash? Your business is gone. No cash, no business.”
Pro: Your Business, Your Way
What’s one of the greatest joys of financing your own business? “You have complete control,” says Smith. “You’re not beholden to anybody but yourself. You don’t have investors looking over your shoulders asking for specific returns. You decide how the money is being used. You decide how fast you’re looking for a return.” This is one of the big reasons so many entrepreneurs—as our survey shows—do decide to go the route of self-financing. It’s a reason that’s awfully hard to argue with.
These pros and cons should hopefully help guide your decision to either self-finance or go with a commercial loan. Regardless of which way you go, it’s worth remembering some advice Smith shared with us: “No matter where you get your money from, you have to take a long term perspective and acquire some financial savvy to be a successful business owner.”