Using your own personal funds to finance your business may seem attractive to entrepreneurs–you maintain full control and ownership of the business and aren’t beholden to anyone. But do the benefits outweigh the risks?
In a word: nope.
When you’re a self-funded entrepreneur, you’re in it alone. Investment firms and lenders usually come with advisors and mentors, a community on your side. At Lendistry, we have a partner non-profit called The Center where business owners can receive coaching for prolonged success and help navigating the business world.
When you rely on personal finances to run a business, your personal life is tied to and reliant on your business. Whether or not your family goes in vacation, what car you buy, and every personal financial decision you make are dependent on the needs of the business.
Of course, there’s one elephant-sized risk. If your business fails or even just goes through a long enough slump, you could lose your house, personal possessions, and personal credit.
Now that technology and fintech have made entrepreneurs less dependent on traditional bank loans, there are lots of alternatives to using your own funds to get started.
- Crowdfunding has allowed great ideas to develop into millionaire-making products. But it can even work on a smaller scale, depending on your business goals.
- Microloans help entrepreneurs with modest needs or low credit get financing in small amounts.
- Startup accelerators and incubators provide the momentum entrepreneurs need to get off the ground.
- The Small Business Administration (SBA) is a great place to find local resources.
Using a loan, crowdfunding, investors, etc. is also preferable to liquidating investments that generate an income, like stocks or real estate). These sources of income may be even more valuable when running a business where income is less reliable than a salaried job working at someone else’s business.
It’s one thing to invest some money you’ve saved into your business, it’s another to risk your and your family’s way of life by tying your personal financial stability to your business venture. If you do use some of your own money, it should be done as a loan or as equity with a legal paper trail and the help of professional accountants.