How you structure your business will be a determining factor in how you finance it. You can take a business loan, or you can use cash, also known as bootstrapping. Neither is risk-free, and both can impact the future of your business. Is using cash to run your business a good idea?
Business loan versus bootstrapping
There are several ways you can bootstrap. You can tap into your personal savings account, borrow against your 401k, or ask family and friends to help you out. You can also crowdfund. However, with some online funding types, such as Kickstarter, contributors will expect something in return. These are examples of self-funding. There are no loans involved, no paybacks expected, and in most instances, the only risk is to yourself.
If you use personal funds, you won’t need to worry about your credit score. It’s also important to mention that self-funding does not mean tapping into credit cards or home equity loans. It is strictly a cash investment. Using any personal credit is not considered self-funded, and it can put your credit at risk.
A business loan requires regular payments until all money is repaid. This can impact both your personal and business credit, so you’ll want to make certain that your business is stable before speaking with a lender.
Dipping into savings
When you decide to start a business or invest more in an existing business, you might be tempted to use your savings. Before using the funds put aside for a vacation, retirement, or creating a safety net, you need to weigh your options.
Will you be left with enough money in the event of an emergency?
If using a 401k or other retirement fund, will there be a penalty for early withdrawal or other tax consequences?
Will the business generate enough revenue to allow you to replace the funds?
Although using your own funds might seem like the best option, it can have more long-term risks. Especially if your credit score is iffy, The older you are, the sooner you’ll need a retirement fund, and you could leave yourself cash-strapped in the golden years. When using a retirement fund, make certain to keep at least 50 percent in the account.
An option with more risk is to cash in or borrow against an insurance policy. While it’s unnecessary to pay back a loan against a policy, it can leave you in a bind if and when you need the insurance.
Taking out a business loan
If your business is structured as a corporation or LLC, a business loan provides less risk to your personal credit. A loan might give you more working capital. And, with regular payments, it will boost your business credit score.
Whether you’re in a position to choose between bootstrapping and a business loan, remember that you can put your personal finances to good use. If you cannot meet payments on your business loan, using personal funds can become business equity. If you choose to self-fund entirely, once your money’s gone, it’s gone. You will back yourself into an uncomfortable corner if you don’t generate the revenue to replace it.
Is using cash to run your business a good idea? Explore your options with hindsight and foresight so that the future of both your business cash flow and personal cash is secure.