Contrary to popular opinion, it’s OK to use personal money to fund your business, particularly in the start-up phase. Other financial sources, such as banks and venture capital funds, want to see a personal investment before they’ll agree to give you additional funding. Putting your own money on the line shows that you believe the business will be successful.
Another argument for self-funding your business is that you won’t take on any new debt. If you currently have outstanding credit card debt, you might want to take out a debt consolidation loan to get that taken care of. That will lower your personal monthly overhead and make it easier to budget for the investment you’re about to make in your business.
<h2>5 ways to self-fund your business</h2>
Begin this process by compiling an inventory of all your assets. That should include savings, investment accounts, retirement funds, vehicles, equipment, and equity in any real estate holdings you currently own. Add up their total value and then do a cost analysis on the business. Five options to consider after that are:
- Withdraw money from savings: This is the most obvious and least impactful option. Savings accounts don’t usually earn much in interest and are the most liquid of all your assets. If you can fund the new business entirely from savings, you’re in good shape. Take what you need, but you should try to leave a little something in the account for emergencies.
- Downsize your investment account: Sell the bonds. Your equities have a higher rate of return and could make up your losses from bond sales in a few years. If you must sell equities, start with the ones showing losses. You can turn them into cash for now and take a tax deduction for the losses when you file next year.
- Take out a loan from your 401(k): This is obviously dependent upon having a 401(k) to take a loan from. Funding your business this way is a great option for those who want to keep their full-time job while they grow the business part-time. It’s classified as a “loan” because you need to pay it back, but you’re essentially borrowing your own money.
- Sell vehicles and equipment: You can live without the boat, and that old tractor in the garage is worth something to someone. Most folks have vehicles and/or equipment lying around that could easily be converted to cash. There might even be some old furniture or household items you can sell at a yard sale.
- Apply for a HELOC: A home equity line of credit (HELOC) is like a 401(k) loan because you’ll be borrowing your own money. It’s riskier because you’re putting your home on the line as collateral, so make sure you can cover the payments on the HELOC from other income and savings sources while you get the new business up and running.
Some people fall in love with their business ideas and are willing to risk it all to make them successful, but that’s risky. When going through this process, make sure you leave enough in savings and investments to cover you if the business fails. Using your own money to fund a business is not a bad idea, but always put money aside for personal needs.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.