I’ve been asked this question (using your personal savings to start your business) on several occasions when I consult for startups or small business owners seeking to expand. Why I may not be a financial analyst, I can speak to you from my experience. You must first as a matter of necessity separate yourself from the business.
Building any business as I say to business owners takes time, effort, and money. It is not a child’s play, neither is it magic. If you are interested in setting up a physical office structure against an online business then this definitely requires more time.
This is the point where you need to have developed a plan to get the needed funds. Read here instructions if you are trying to get investors for your business. So whether it is a loan or soucing funds from investors, you must have a clear business proposal.
Another way to raise funds is to seek help from friends and family in addition to using your personal savings as your capital.
The question remains, which is the preferred way to go when it comes to sourcing funds to start a business?
Using your personal savings is a capital injection which you may get back as a way of profit or as a loan to be paid back by the business.
Using your personal savings or that of friends and family entails the following:
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Quicker start up-time
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An interest-free loan from family and friends
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Gives you 100% business ownership
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There is also a slight possibility of inability to scale immediately
You may however need to consider the following before going this route:
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Huge financial impact with possibly nothing left for emergencies- Your financial health is very important as it keeps you in the right state of mind to tend your growing business.
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Profitability analysis which will help access how quickly you can recover your personal savings. You must take your start-up costs and operational expenses into consideration when working out your profitability analysis. Your profitability analysis often depends on your turn over and your expenses.
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It is also great to take note of your overhead costs which will increase as your business expands. If you’ve already used up all your personal savings, you become stuck and there is no recourse to fall back on.
Getting an investor or taking a convenient business loan is perhaps the best way to go as it helps to reduce your financial risks and cushions the rude shock of investing a huge amount of your personal savings in your business.
It is however still okay to invest your personal funds if you are not starting from scratch(Perhaps this is an expansion of existing businesses)as long as you have taken care of your financial health, emergency provisions, and retirement funds.
From my experience, investors and convenient business loans are best for starting a business as against personal savings.