Put personal money in a business

Dear Business Banter,

I’m trying to start a business – I make organic soy candles. But I have a funding problem. I’m just thinking of putting my own money to start the business. Do you think this is a good idea? – Amanda

Dear Amanda,

Congratulations on taking the next step towards entrepreneurship! While investing in your fledgling business with your own money can be tempting, there are pros and cons to doing so.

Do you have a business question for Erica? Drop him a line at Ask banking experts page.

Benefits of using your own money

There is something to be said for investing your own hard earned money in your business. Most notable is that you will be heavily invested in the result. The last thing you want to do is lose the money you have worked so hard for and sacrificed to save.

Using your personal funds can give you the passion to overcome common small business hurdles. Because there is so much at stake, you could wake up early in the morning and work later at night than if you were just relying on funds from a bank.

In fact, it’s a similar concept to a mortgage lender who expects a home buyer to pay at least 20% as a down payment. The more the buyer has invested in the home, the less likely they are to opt out of the obligation if times get tough.

Another positive benefit of using your own money is that you won’t be charged interest. The financing fees that come with installment loans and credit card debt that you carry over month-to-month eat away at valuable revenue. When you use your own money, you don’t have this problem.

But, while it’s a good idea to put at least some of your personal savings in your business, it does come with a few caveats.

Disadvantages of using your own money

Over-relying on your own money

This can put you and your business at a standstill. Unless you have particularly deep pockets, it’s more than likely that you don’t have enough cash to get past the launch, even if you go this far. New entrepreneurs are often caught off guard with unforeseen expenses.

Blow too much money at the start

Ultimately, you may want to apply for a business loan or a business line of credit. If you do, the lender will probably want to see that you have assets in the bank.

Assets such as cars and real estate are good, but money held in savings, money market or brokerage accounts, treasuries or certificates of deposit is better.

If you don’t have anything that can serve as collateral, you might be out of luck for bank assistance when you really need it. This situation will jeopardize your business plans.

No credit history or credit score

One downside to using only cash is that you won’t create an attractive credit history. Without borrowing from a creditor who provides information to the three major credit bureaus (Equifax, TransUnion, and Experian), your credit report will be empty.

It also means a credit score will not be developed because there is no data to enter in a mathematical risk model. Therefore, while you can be sure that you are a low credit risk borrower, other lenders and businesses will not have such confidence.

No benefits or rewards

A huge advantage of using business credit cards is that they come with rewards programs specially developed for the needs of a small business owner.

For example, if you were to get a credit card that comes with 0% APR for 12 months, you would have one year to use the money from the card issuer to purchase products such as products for your candles, packaging and shipping without any finance charges being added to debt (as long as you’ve made your payments on time, then remove any balance before the promotional rate ends).

You can accumulate cash, points, or miles with almost every purchase, as well as potentially a significant amount when you open the card and spend a minimum amount in the first few months. Most of these cards also have great accounting features, which will help you track your costs and prepare your taxes.

What you should do

The best course of action is to do a little of both. Evaluate how much money you are willing and able to invest in your business. You should always have cash in a bank account that will double as collateralized assets in case you want to take out a loan. It will also serve as an emergency fund in case you need to access the account for something important when borrowing is not a good option.

Take this time to build up your creditworthiness to overcome your current funding issues. Get your credit reports from AnnualCreditReports.com and get your credit scores (the most commonly used are FICO scores, and you can get them from myfico.com).

Payment history is most important to lenders, so your scores may be low if you have missed certain payments, especially if the delinquencies are recent or severe (more than 30 days late). While you can’t delete them until they’re seven years from now, receive all future payments on time. If you have credit cards and the debt is high compared to the amount you can charge, you’ll want to pay off the balance so your credit utilization rate opens up.

See related: Best Secure Business Credit Cards for 2020

If you’re new to credit and have nothing to report, consider a credit builder loan. These products are often available from credit unions. The way they work is that you take out a small loan, but instead of receiving cash, the money goes into a guaranteed savings account or certificate of deposit.

You would repay the loan in equal installments, typically six to 24 months. As you do this, the lender forwards your activity to the credit reporting agencies, thus establishing an excellent credit history! Once the loan is fully paid off, you get the money, so it’s also a savings vehicle. And depending on the lender, some or all of the interest you paid will be returned to you.

So what does that leave you with? More money for your business efforts and a credit report filled with great information!


Source link

About Roberto Dias

Check Also

9 pumpkin things you can buy besides Starbucks Latte

Most or all of the products presented here come from our partners who pay us. …

Leave a Reply

Your email address will not be published. Required fields are marked *