Using Personal Savings to Start a Business
With credit tight these days, you may have to raid your personal savings to start a business. Even if you secure debt financing or equity financing, it may be necessary to invest a big chunk of your personal savings into your new business.
Personal savings are the most common source of funds for a new business.
Even if you are planning on getting a business loan, most lenders require that a reasonable percentage of your own funds be invested in your business, as an indication that you will work hard to make the business a success.
In fact, you will find most investors unwilling to consider your request for funding if you have not contributed cash.
It's called having "skin in the game," and it makes sense. Investors don't want you to be able to fail with impunity.
The more money you have in your company, the more motivated you will be to succeed. The more motivated you are to succeed, the more likely that investors will get a positive return on their investment.
So, it is very helpful if you, as an owner, use funds from your own savings to finance the business in its earliest stages.
This can present a problem, though. Most entrepreneurs do not have the personal resources to provide all of their initial financing. As a result, almost all business owners must borrow money from outside sources.
There are other personal funding sources besides the money you have in your bank accounts or the cash you have stuffed under that mattress. For example, you may also want to consider such personal sources as the cash value of a life insurance policy, a home equity loan or even a credit card.
Combining personal savings with external sources of debt and equity will permit you to benefit from the effects of leverage, i.e., using other people's money to earn a profit for yourself.
However, one of the biggest advantages of using personal savings to fund your business is your easy access to those funds. There are no loan applications to complete, no lenders to visit, no paperwork to prepare and no interest payments to make.
Finally, a big advantage of having your own start-up capital is that it ensures that you retain ultimate control of and responsibility for your business.
Long story short, if available, personal savings are a valuable source of capital for your business.
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