60% of home-based businesses are started using the founder’s personal savings. This is a strong indication that this practice is quite popular, but there are also strong indications that not all popular practices are good. Therefore, should you use your personal savings to start a business?
There are strong arguments for using your savings to start a business, and there are equally strong arguments against it. But which should you go for?
In this post, I’ll show you the best way to start a business using your savings, and the pros and cons of starting a small business using your personal savings exclusively.
What is “Personal Savings?”
Personal savings in this context refers to any sum of money that you can access and is solely yours, either borrowed or earned. As long as the money wasn’t an official investment in your business, it’s your personal money.
However, the money that you get by soliciting financial help to invest in your business isn’t considered part of your personal money.
What is it called when you use your own money to start a business?
The money used in starting up your own business is called “Startup Capital.”
How to Start a Business Using Your Savings
Starting a business with your personal savings might not be a very bad idea after all. Many businesses that were initially funded by the founder’s savings have grown insanely in no time, and you can also replicate their successes.
However, there are many things you must and mustn’t do to ensure that your start-up doesn’t fail, even if you started up with your savings.
Here are some tips to help you start a business on your savings without closing down within the first year.
- Supplement it with a business loan
Before starting a business on your savings, it’s important to consider supplementing it with a personal loan.
Unless you’re one of the richest people in the United States, your personal savings can’t really start a big business. Starting a business with insufficient upfront capital will only increase the chances of it failing in the first few months.
Also, betting on a business with a significant part of your money will make investors willing to grant you a loan. You can take advantage of this willingness to get funding for your business to accelerate your growth and increase the scale of your business.
- Monitor your expenses
This may seem obvious, but with 90% of businesses folding up in the first five years, it’s evident that many entrepreneurs still overlook this important tip.
Paying for accounting software is almost always worth it, as it will help you monitor and maintain a healthy cash flow.
- Separate your business account
You should also allocate a certain budget to your business per month to avoid overspending your personal savings. Since you use your credit and debit cards to cover most transactions, it’s very easy to overspend without even realizing it.
It becomes increasingly difficult to monitor your expenses and keep good records when your accounts are convoluted.
It even helps create another account for your business. While you’ll be funding that account with money from your personal savings account, it will be easier to allocate a fixed budget to the account without going over the top.
- Cut costs
When you’re running a business exclusively on your personal savings, you’re running a budget business. Just as when you’re shopping on a budget, you should strive to cut costs also when running a business on a budget.
To cut costs, you can analyze your expenses, check for things that aren’t necessary to avoid spending on them. You can also buy second-hand equipment to save money, as they generally work as well as new while being much cheaper.
Advantages and Disadvantages of Using Personal Savings to Start a Business
While you can start and run a business effectively on your personal savings, there are some pros and cons of the strategy that you should know about beforehand.
In this section, we’ll analyze some of the advantages and disadvantages of starting a small business with your personal savings.
- Advantage of using personal savings to start a business
There are very obvious benefits to starting a business using your savings. Here are some of the reasons why you may want to start your next business using money from your savings account.
- Accessibility of funds
When trying to get investors to invest in your business, you may have to go through a lot of steps and process a lot of paperwork, all of which are justified. After all, nobody wants to invest in a business that’s already doomed to fail.
However, you don’t have to go through these processes if you’re using your money. Once you’re sure that your business strategy is perfected, you can instantly access your money and start your business.
- Less pressure
Nobody wants to invest in a failing business, and no entrepreneur wants to disappoint investors. The unwillingness to disappoint investors in your business puts extra pressure on your business, making it more difficult to control.
When you create a business using your personal savings, you suffer all incurred losses or profits alone without worrying about any debts that you may need to pay off afterward.
- Disadvantages of using personal savings to start a business
While there are obvious advantages to starting a business using your savings, there are equally serious cons. Before starting a business with your money, you should be aware that it will negatively affect your standard of living.
Since you now spend a significant portion of your income on your business, you can no longer spend as much as you used to. This will force you to change your lifestyle practices to fund a business that may potentially fail.
Also, businesses that run exclusively on the founder’s income have a lower chance of success than those with external funding.
Is it a bad idea to get a loan to start a business?
Taking a loan to start up a profitable business with a good plan is indeed a good idea. However, Obtaining a loan to start up a non-lucrative and unplanned business is a risky idea as you might end up not being able to pay back the loan.
Conclusion
It’s certainly possible to start and grow a business using your personal savings, and some practices will make the process more likely to succeed.
Also, there are some advantages and disadvantages of using your own money to start a business, and most of them are explained here. If you’ll like to go ahead anyway, you should consider reading the tips to running a business effectively on your savings.