Advantages and Disadvantages of Using Personal Savings to Start a Business
January 2, 2019 | Last Updated on: July 15, 2022
January 2, 2019 | Last Updated on: July 15, 2022
Congratulations, you’re ready to start a new business! Once you have your concept, where do you get the money for funding your business? Fifty percent of small businesses use personal funds from the company’s founder to get started. If you can afford to do so, you’re going to look at your business venture differently than if you’re using money from a startup business loan. It’s your hard-earned money that is at risk.
So what are all the things you need to keep in mind when you’re choosing how to finance your company’s early stages? We’re going to cover all of them right here.
If someone asked you how you’re planning to get the business off the ground, would you know how to answer? Starting with personal funds is usually the first thing that you’ll think of, but very often business owners haven’t planned out exactly how they’re going to manage it. Creating a business plan prior to the launch of your new venture is key to getting started on the right foot.
If you haven’t decided which accounts you’re going to take the money from, you may be considering taking money out of your retirement or savings accounts. If you choose to take money from your retirement accounts, remember that tapping into these accounts early means that you’ll have to pay a penalty fee, as well as pay taxes on the amount that you’re withdrawing. If you’ve got funds socked away in a personal savings account, you’ll want to make sure that you’re not draining your rainy day fund by mistake.
The best way to launch a business is by planning well in advance. Take a certain amount out of each paycheck from your current gig and put it towards your business venture. Once you reach a certain amount, you’ll be ready to get going. That way it doesn’t come out of your retirement or emergency savings and you won’t need to face any fees from the government.
When you’re just starting out as a business owner, it’s natural to think about hedging your bets and playing it a little safe. That’s why entrepreneurs often start their companies on shoestring budgets without much extra financing in reserve. But there are good and bad sides to doing it all on your own.
Advantages of self-financing your business:
Disadvantages of self-financing your business:
One of the best approaches is actually to look into dedicated business financing options to go along with the personal funds you’re able to dedicate to the company. Once you’ve decided where your personal funds will come from and how much will be invested, you’ll be ready to make other key decisions and be well on your way to opening your doors for business.
There are multiple reasons why small business owners should separate their personal finances from those of their business from the beginning, such as the ability to track how much has been invested and different tax-related benefits.
By opening a business bank account, you can use expenses to reduce corporate profits. If you’re paying corporate bills from your personal account, it’s not considered a tax deduction. You’ll be paying personal income tax on the amount of the expenses paid from your personal account.
Incorporating your business separates your company’s assets and liabilities from your personal ones and adds an extra layer of protection if your business fails. There are many options to choose from when organizing your business’ legal structure: LLC, sole proprietorship, partnership, and C or S corporation. A large majority of new businesses start as a sole proprietorship or partnership then move into an LLC or corporation as the business grows. Keep in mind that it’s a lot easier to move personal money in-and-out of an LLC.
While incorporating means more paperwork to file, it has its benefits, such as:
But there are some cons:
Tip #1: Keep your day job. If you’re going to build your business out of your personal savings, it always helps to have another stream of money coming in. If you’re not in a position to branch out and dedicate yourself to your new business 100 percent just yet, keep your 9 to 5 or even go part-time. Some money coming in from another source is better than having to “eat what you kill” especially when you’re pre-sales.
Tip #2: Always separate home and work finances. When using your personal savings to fund your business, it’s important to separate your work and home lives. Always make sure that there’s enough in your personal bank account to take care of yourself and your family, including household expenses and unexpected bills. The last thing you need when starting a new business is to spend $20,000 on a new roof for your house! At some point, there will be a rainy day and you should be sure you have enough set aside when that time comes.
Before you decide to start a business out of your personal savings, it’s a good idea to have a few important conversations with people you trust. Seek out advice from other small business owners, your accountant or financial advisor, and your family. Putting money into a business is easy, but you don’t want to make the wrong decision that will cost you and your business in the long run.
If you follow these important steps you’ll be able to do much more than just get your business off the ground with your personal savings. You’ll be on your way to a successful business and a very bright future.
Read through this whole article and you are now unsure if you want to mix your personal and business finances? Check out our helpful Guide on Keeping Personal and Business Expenses Separate.