The top advice you have probably heard from experts from the earlier years and you still hear is that you should never mix your finances with business. While this is true, you also have to consider how you will finance your business startup. Usually, a business loan works best for these purposes. The main challenge with startup loans is that businesses do not have sufficient credit rating and history to guarantee a loan.
This would leave you with two options. One is to use your credit rating to secure a business startup financing, and another is using your own money to start a business. Whichever the route you decide to follow, you will still be looking at mixing your finances with business costs. Therefore, as much as the advice is viable, it only applies to established enterprises.
Also called external financing refers to taking out credit from investors or lenders to be able to start a business. This kind of financing helps you to mobilize funds faster to kick-start the process of registering and buying inventory required for your business. Outside financing has its merits and demerits. Some are highlighted below.
Merits and demerits
It is a quicker way to mobile finances towards starting your business venture.
External financing is especially good for raising extra money you may need for extra costs. For instance, new businesses require equipment that is consistent with the modern needs of your prospective clients. The extra money you may secure shall be used to attract customers and meet a few running costs for the business.
Outside sourcing of income may come in the form of trading some shares of your company for finances. By doing so, you will have to cede some percentage of ownership to the new investor. This process does not require you to make repayments with interest unless you want to buy back the business equity. The investors in the event they occupy some ownership in your business, they are eligible to vote on the decisions the business takes.
One demerit about this kind of investment is that the stakeholders are entitled to know all the information regarding the business and whenever they feel you are not the right person to lead their interests, they can vote to remove you from the management.
Additionally, you can bring in a partner so that you can share the costs of running the business, profits and losses in the proportion of the contribution.
This is also known as internal financing where you use your fiancés to raise sufficient capital to start and run the business without involving another party.
The common term used to describe this condition is bootstrapping. Here, you are required to use the available resources to start and run your business enterprise without help from outside sources.
Bootstrapping allows you to continue running your company as you maintain full ownership. This way, you don’t run a risk of being voted out of management. It also gives you legitimacy whenever you face the lenders when it comes to expanding the business.
To be able to save cash for other functions, you need to explore different ways of making use of the finances you have. For example, use cheap labour and hire only if you have to. Consider using interns whom you may pay a small stipend instead of regular employees who you will need to pay higher and on a regular basis. Also, you may need to pay bonuses and make a positive environment conducive for work.
You can borrow from your pension account or against your assets like personal vehicles, etc. So, when are personal loans necessary for you to take out to finance your business?
When it is the cheapest option. Raising enough cash for your business is not an easy fete. Personal loans may be a good option if you are unable to get a loan option which does not only function for your business but also, it is affordable for you especially if you are just starting.
Consider top evaluate the cost-benefit of taking out this loan against the rest of other options available to you. It is not fair to miss on your opportunity to conquer the market and build a future name for your brand based on lacking sufficient finances. If you can take out a personal loan to bridge the gap, then it does so.
If you have a concrete plan to repay the loan. You can take out a personal debt if you are well placed to repay the debt. Close the doors to debts when your business becomes self-reliant and you can repay the debts you incurred.
Finally, if the only option you have is to take a personal loan, then you might want to fancy the option. There are certain times when taking out financing is beneficial to you. One is when it is the only cheapest option; and, when it is the only option.
The Bottom Line
Using your own money to invest in your business for a startup remains to be the only viable option for you. However, it may not be sustainable; hence calling for the introduction of external sourcing. It is, therefore, a question of preparedness and a connection with the clients. If you started a business from a clean slate, there is a likelihood that you may not get customers for a while. As this period continues with the same trend, the business is running and you are incurring operational costs. These instances call for extra cash. That is why, in the above passage, you have been guided on the need to have extra cash to facilitate overhead costs and such expenses.
To answer the question of whether it is preferable to start a business using your finances or debts; the former is the most viable option. However, times come when you are forced to consider financing.
If you choose to borrow, know legal vs. illegal lenders to avoid losing your hard-earned money. Visit https://www.gmcreditz.com.sg/ and learn more about licensed moneylenders.