Personal Financing for your Small Business

Small business founder funding is a form of personal financing for your small business and is probably the easiest financing option you have for your startup.

Founder funding either involves investing cash you already have into your new business or borrowing in your own name to finance your start-up.

With this type of funding (i.e. personal financing) there is less risk to external parties, as you are either using your own money or they are lending to you personally rather than to your new untried business. As you are likely to be required to provide a personal guarantee, you are far more likely to be offered the funding than if you were to borrow as a newly formed business entity.

The one thing to keep in mind when you are thinking about sinking your life savings into a new business is that you are (hopefully) making an investment. Does your business model have the potential to make a decent return on that investment or are there better ways to make your money work for you?

Using Your Savings

Founder funding is where you sink your own savings into your new venture, and it is one of the most common sources of funding for smaller new business ventures.

In fact, regardless of which financing options you decide to run with for you new business, you are likely to be required to make a personal investment. No-one will lend you money for your new business unless you share the risk!

To fund your new business entirely with founder funding you will have to be comfortable that you have sufficient finding (savings) available to operate the business for at least three months - if you can fund operations for six months, it would be betterfor the business and for your health! If you select this method of funding, don't forget to keep something in reserve for emergencies or unanticipated expenditure.

Things can and will go wrong, and no one is able to plan for every contingency!

Mortgage Financing

If you do not have enough in savings to fund your business, you might like to consider using the equity you have in your home to raise the required funds.

Of course this is only an option if there is a gap between the value of the property and your mortgage debt. You will also have to convince your bank that you not only will you be able to repay the additional funding you require, but also that your income will be sufficient to maintain the capacity to manage your existing debt.

A really well researched business plan may just help you do that!

Using Funds from a Personal Loan or Credit Account

If you do not have savings available to finance your small business startup, another way to obtain personal financing is to talk to your bank about a personal loan or to use a pre-existing line of credit.

The risk with this type of founder funding is that regardless of the legal structure you choose for your small business, you will be personally liable for this type of loan. If your business fails or is a slow starter you may find yourself in a difficult situation.

If your business does not succeed, you will still have to pay back the loan plus interest and you may very well have no income to do it with!

Personally, when it comes to persoanl financing, I would never borrow more than I could comfortably repay if I was forced to go back to a normal 9-5 job. So before you run out and get a personal loan, consider how much you could afford to repay on your normal salary!

Using Your Credit Cards

Credit Cards are form of personal financing, but usually a bad one as they charge a ridiculously high interest rate. Only use them as a last resort, or where you are able to pay off the full balance at the end of the interest free period.

The same risk applies as for personal loans. You will be personally liable to repay the debt, regardless of how well (or how badly) your small business is performing.

Other Sources of Funding

If this form of funding is too risky for you (or just not available) you might want to check out the other forms of equity funding, or debt financing.

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