Raising money to fund a business might be one of the most challenging aspects of running a business. Entrepreneurs can turn to loans from different sources, and in rare cases, personal savings.
If you’re thinking about funding your business using your savings, you may be on the right track. It sounds like one of the best sources of funding, but it’s certainly not with its downsides.
In this article, I’ll show you some of the advantages and disadvantages of personal savings in business. Also, you’ll learn some tips to help you get started with funding a business using your savings.
Advantages of Personal Savings in Business
According to research by Direct Line for Business, entrepreneurs prefer to use their personal savings to fund short-term cash requirements, as over 39% of home-based businesses have once spent from the founder’s personal savings, at least.
In the same study, personal savings come out top as the preferred source of start-up funding for new businesses, with the start-up capital of over 60% of home businesses coming mostly from the entrepreneurs’ savings.
These statistics all prove that personal savings are a preferred source of capital for most entrepreneurs, but why is this the case?
In this section, you’ll learn some of the advantages of starting up a business with your personal savings.
- Full Ownership
Exclusively funding a business with personal savings means you’re fully taking responsibility for the business. It means you don’t owe anything to anybody, and you don’t get to pay any debts from the revenue.
When you start a business by taking a loan, you won’t want to disappoint the entities that trusted you with the loan. This added burden makes the process of running a business less enjoyable since you want everyone to think their investments are worthwhile.
- Easy Access to Funds
When trying to get a loan from a bank or even friends and family, you may have to go through the extraneous processes of signing paperwork, completing loan applications, explaining your business strategies, and most especially, convincing the lender that your business idea makes sense.
However, you don’t need to do all that if you were simply going to use your money. Funding a business using your personal savings means you don’t need to negotiate interest or complete any paperwork.
Most importantly, the only person you need to convince that your business strategy makes sense is you.
- Better Management and Control
Funding a business with loans from family, friends, banks, and other lenders gives you access to money that you may be unable to manage effectively.
With your personal savings, you only buy things you can afford, and you’ll know instantly if you’re going overboard. You will be unmotivated to buy super-expensive equipment, as it cuts deeply into your balance, warning you of impending decline.
Since it’s difficult to estimate how much money your business will make in the long run, mismanaging your personal savings will be far less consequential than mismanaging a loan you got from an external lender.
Disadvantages of Personal Savings in Business
While personal savings may be the preferred way of funding a home-based business, it’s certainly not failsafe. There is a reason why 10% of startups fail in the first year of service after all.
Before investing all of your personal savings in your business, it’s important to learn about some of the potential risks. Here are some of the disadvantages of funding a business with your personal savings.
- High Risk
Funding a business with your personal savings has to be one of the riskiest things you can ever try. If the business were to fail, you’d lose all of your personal savings, as well as some of your personal belonging, if you went that far.
For this reason, it’s almost always safer to avoid funding your business with all of your personal savings. Instead, you should try complementing the loans you get with your personal savings to create an effective balance between risk and control.
- Lower Standards of Living
By channeling most of your personal savings into your growing business, you’ll be compromising on your living standards, effectively betting the money on your business.
While that isn’t necessarily a bad thing if the business eventually succeeds, there is a very high chance that the business won’t succeed, if available statistics are anything to go by.
Since nine of out ten businesses will fail in the first five years, betting the convenience and wellbeing of you and your family on a business that will almost certainly fail in a couple of years doesn’t seem to be well worth it.
- Reduced Networking Opportunities
When investors invest in a business, they do everything possible to make sure that their investment doesn’t go to waste. Funding your business with your personal savings is a sure way to miss out on all of these, making it even less likely to run a successful business.
One of the most important leverages investors provide apart from monetary benefits is networking opportunities. Since most people invest in businesses in a specific industry, they can link you with other industry experts to accelerate your growth.
- Reduced Scalability
When you create a business, the foremost goal is to scale and expand the business as much as possible. While this is possible using your personal savings, it will make scaling a lot more difficult.
With funds from different lenders and investors, you have enough money to buy all the necessary tools and materials in large quantities to expand your production capacity, thereby expanding your business.
Over the years, entrepreneurs have relied mostly on their personal savings to fund their businesses. While this strategy is good, it doesn’t always work well.
In this article, you’ll learn about the concept of funding a business using personal savings. You’ll also learn the good, the bad, and the ugly sides of funding your startup with money from your savings account.