If you’re someone who’s starting a business of your own that requires a significant financial investment up front, finding a source of funding can always be a challenge, especially when the calculated average cost of starting a business is around $30,000. This is particularly true for all those young entrepreneurs who don’t have a strong credit history or those who don’t want to go through the hassles of dealing with private lenders and banks. Once the start-up entrepreneurs are done with considering their options, it’s not at all unusual for them to ask for money from friends and family members. Unlike private investors and banks, these people will trust you.
Another way of starting off with your own business without borrowing too much money is by digging into your personal savings. It’s not a secret that the most vital source of start-up financing is the personal savings of the founder of the business. But while most people will advise you about using your personal savings, they forget the more important question of ‘what percentage of your personal savings should you use?’ Should you pour in all your savings into your nascent business? Or should you use 50% of less than that? The concerns of this article deals with some tips on how you should use your personal savings effectively to get your business off the ground. Have a look at some such tips.
- Keep back $5000 in the bank account: A good rule of the thumb is to have at least $5000 in the bank all the time. This is not only a good option for you but it is also good for your business. Because no matter how great and lucrative your business concept is, there’s a decent chance that you may need a sudden infusion of cash at some point in the first 24 months of opening your business. There might arise certain issues like unexpected bills or legal work or you may need to fund an opportunity such as a new client who won’t pay up-front. Dealing with such time-sensitive cash needs without having enough money in your bank account could put you and your business at risk and also lead you to take counter-productive decisions.
- Borrow from 401(k) in a limited way: You must be having an employer-sponsored retirement savings plan like a 401(k). Borrowing money from such a retirement savings isn’t always a bad idea. Most plans allow you to borrow up to $50,000 or 50% of the value of the account, whichever is less. Unless you don’t pay back the money, this withdrawal is considered as penalty-free. If you don’t pay back the money, there are some early-withdrawal penalties that will be applied. When you’re borrowing money from such an account, you will need to repay the interest to your own 401(k) account at a rate set by your plan administrator. This kind of borrowing may be a smart option but you should ensure that you have the ability to repay the entire amount within the right time.
- Utilize your personal savings: You can also borrow against the $5000 that you have tucked aside in your bank account. According to the experts, it is always better to have a low-interest loan from a close friend or relative than to use your entire personal savings amount. This is because it is better to borrow money in a position of strength rather than weakness. The only alternative would be to wait until you’ve run out of all your money and then again return to your relatives and friends. This won’t be a good decision. In fact, depending on your financial condition, it is better to reduce the amount that you would borrow from your 401(k) and increase the amount that you could borrow against your personal savings account. Taking a responsible financial decision at this point of time is very important.
- Use a low interest credit card: If you can stagger your $25,000 in expenses so that you don’t need to full amount up-front, you can also use a credit card effectively. Although another way out is to take out debt consolidation loans and use the money in starting off with your business but this is a loan that will carry high interest rate and you need to repay the loan on time. As long as you can avoid building up a huge balance on your credit card and paying exorbitant interest rates, there’s nothing bad in relying on such credit cards to finance your business expenses.
Therefore, if you’re about to start off with your own business organization, ensure following the above mentioned ways to avoid falling in debt even before you’re an entrepreneur. Debt can mar your reputation and your business at the same time.
