Using personal funds to launch: pros and cons

Personal finance

Having an idea for a business is the start of what can be a very exciting journey, although in truth it may feel more like a rollercoaster ride at times. In particular, coming up with the funds to get the company off the ground at a time when money is tight can be challenging.

Having to consider the route of traditional financing, organising the right business loan and shopping around for the best deal can be very daunting, and this is why a number of people choose to put their personal money into a business. While this might sound like a good idea, it does have its pros and cons, so read on to learn more.

What is meant by “personal money?”

Basically this refers to any funds that you borrow, receive or have as an individual in your own name and not under the business. An individual may decide to self-fund their own start-up using their savings, and on the positive side, it means that there isn’t any additional cost involved. However the downside to this is that there is no interest to be made on the savings, and, if something does go wrong, there is no nest egg to fall back on to support day to day living.

Another option is to consider personal debt, which means using the family home as equity against a loan, remortgaging the property to provide start-up funds, or simply buying equipment, renting premises, purchasing stock, etc. using a personal credit card. Providing that as an individual there is no problem with your credit rating, this is a relatively simple way of getting the business off the ground, which is an advantage. Conversely, you have to be really good at managing individual credit card debts, arranging payment in order not to attract interest on the cards used, and more importantly, not borrowing any more than you can afford.

The pros of self-financing

Having control over the finances, particularly if it is personal money that is being used, is one of the positives. It leads to an even more determined approach to ensuring the business succeeds if you are the primary funder. It also means that you are answerable to just the one person – yourself.

Janine Allis started Boost Juice when on maternity leave and began operating from her home before opening the first juice bar in Melbourne. At the time, the banks and financial institutions were not interested in financing a company that just sold juices and smoothies. That was back in 2000 and now the business is fluorishing with 500 stores in 13 countries.

The Allis’ focus and determination paid off and their innovative approach worked, which it often does when your livelihood and family finances are tied up in it. The responsibility that comes with self-financing means that each area of the business is checked over with more detail and care, because each cent and dollar spent comes from your pocket. Also, as a self-funder, there won’t be any of the external influences that will try to move the company down a path that does not sit well with the owner’s ethos or agenda.

The cons of putting personal money into a business

Uncertainty of cash flow is a key problem, and the business has to hit the ground running to start producing revenue quickly. The company may then have to grow very quickly and it could mean spreading everything a little too thinly. This could be a problem and restrict measured and sustainable growth further down the line.

Another key area of concern is that unless the individual’s expertise is in the financial sector, and even then it is always best to get independent advice, it could be that there are other methods of finance that will provide a better deal than bootstrapping the company (this refers to the idea that an individual pulls themselves up by their bootstraps).

Experienced loan advisers will have the time and the expertise to source the best possible loan for your needs so don’t be so quick to dismiss that option. This can open up access to a number of crucial markets for a new business, and it gives that much needed kick-start with a cash injection just at the time it is needed. Without this support, the business owner is very much on their own at a time when they do need an initial boost.

Last but certainly not least, there is also the problem of a certain amount of naivety when it comes to funding from personal sources. Even if sourced from family income, if something does go wrong then it is not only the business that suffers but family relationships as well.

Which is for you?

At the end of the day, you need to decide whether the risks of putting personal money into your business is worth it. There is a wide range of external finance options available to businesses, particularly SMEs, these days, including commercial loans and venture capitalists. Thanks in part to the technology start-up boom and television shows like Shark Tank, many businesses these days are discovering venture capital as an alternative, and very viable, source of finance.

While it is understandable that personal money might be seen as the easier and more convenient option, getting on that ladder and promoting the company as a viable and sustainable business is more attainable if external backers are used. Plus keeping everything on a business footing with an external loan or investment, particularly by credible investors, will give a level of confidence to those consumers wishing to build up a long-term relationship.


About the author

Barry Oxley is the Director of Lending Specialists, a mortgage broking business based in Melbourne, Australia. Having been involved in the finance industry since 1970, Barry has seen countless businesses through the business loan process, and knows the importance of making sure business owners are well informed before making any financial decisions.