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, youâ€™re ready to start aÂ new business! Once you have your concept, where do you get the money for funding your business? Fifty percent ofÂ small businessesÂ useÂ personal fundsÂ from the companyâ€™s founder to get started. If you can afford to do so, youâ€™re going to look at your business venture differently than if youâ€™re using money from aÂ startupÂ business loan. Itâ€™s your hard-earned money that is at risk.
So what are all the things you need to keep in mind when youâ€™re choosing how to finance your companyâ€™sÂ early stages? Weâ€™re going to cover all of them right here.
If someone asked you how youâ€™re planning to get the business off the ground, would you know how to answer? Starting withÂ personal fundsÂ is usually the first thing that youâ€™ll think of, but very oftenÂ business ownersÂ havenâ€™t planned out exactly how theyâ€™re going to manage it. Creating aÂ business planÂ prior to the launch of your new venture is key to getting started on the right foot.
If you havenâ€™t decided which accounts youâ€™re going to take the money from, you may be considering taking money out of your retirement orÂ savings accounts. If you choose to take money from yourÂ retirement accounts, remember that tapping into these accounts early means that youâ€™ll have to pay a penalty fee, as well as pay taxes on the amount that youâ€™re withdrawing. If youâ€™ve got funds socked away in aÂ personalÂ savingsÂ account, youâ€™ll want to make sure that youâ€™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, youâ€™ll be ready to get going. That way it doesnâ€™t come out of your retirement or emergency savings and you wonâ€™t need to face any fees from the government.
When youâ€™re just starting out as aÂ business owner, itâ€™s natural to think about hedging your bets and playing it a little safe. Thatâ€™s whyÂ entrepreneursÂ 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 dedicatedÂ businessÂ financingÂ optionsÂ to go along with theÂ personal fundsÂ youâ€™re able to dedicate to the company. Once youâ€™ve decided where yourÂ personal fundsÂ will come from and how much will be invested, youâ€™ll be ready to make other key decisions and be well on your way to opening your doors for business.
There are multiple reasons whyÂ smallÂ businessÂ ownersÂ should separate theirÂ personal financesÂ 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 aÂ businessÂ bankÂ account, you can use expenses to reduce corporate profits. If youâ€™re paying corporate bills from your personal account, itâ€™s not considered a tax deduction. Youâ€™ll be paying personal income tax on the amount of the expenses paid from your personal account.
Incorporating your business separates your companyâ€™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 businessâ€™ legal structure:Â LLC, sole proprietorship, partnership, and C or S corporation. A large majority ofÂ new businessesÂ start as a sole proprietorship or partnership then move into anÂ LLCÂ or corporation as the business grows. Keep in mind that itâ€™s a lot easier to move personal money in-and-out of anÂ 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.Â If youâ€™re going to build your business out of yourÂ personal savings, it always helps to have another stream of money coming in. If youâ€™re not in a position to branch out and dedicate yourself to yourÂ new businessÂ 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 â€śeat what you killâ€ť especially when youâ€™re pre-sales.
Tip #2: Always separate home and work finances.Â When using yourÂ personal savingsÂ to fund your business, itâ€™s important to separate your work and home lives. Always make sure that thereâ€™s enough in your personalÂ bank accountÂ to take care of yourself and your family, including household expenses and unexpected bills. The last thing you need when starting aÂ new businessÂ 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 yourÂ personal savings, itâ€™s a good idea to have a few important conversations with people you trust. Seek out advice from otherÂ smallÂ businessÂ owners, your accountant orÂ financial advisor, and your family. Putting money into a business is easy, but you donâ€™t want to make the wrong decision that will cost you and your business in the long run.
If you follow these important steps youâ€™ll be able to do much more than just get your business off the ground with yourÂ personal savings. Youâ€™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 andÂ business finances? Check out our helpfulÂ Guide on Keeping Personal andÂ Business ExpensesÂ Separate.