Starting your own business is the dream of many budding entrepreneurs, and using your own money to start it can be a way to get things going faster than waiting for a business loan or other financing. However, it also comes with its own set of risks. If you’re thinking of starting your own business and aren’t sure where to start, here are some things to consider before opening up your personal funds.
Advantages of using your own money
You will retain a lot more control over the funds going into your business and will avoid any interest expense on potential loans. If you take out a business loan to start a business, your credit score will affect the total interest experience, with interest payments accruing every year. Using your own money avoids any of these extra costs: the money is yours from the start.
Business owners are also often more frugal and sparing with their own money, so using your own funds from the beginning could also help you make more cautious and well-thought-out business decisions moving forward.
Disadvantages of using your own money
On the other hand, you are also taking a whole host of different risks by using your own money for your business. If you use your own money and your business doesn’t work out, you will be left personally liable and could risk bankruptcy yourself, rather than purely for your business. Bank financing is often covered by certain insurances and you can have individual items held liable should you not be able to cover the total interest expense, rather than putting all of your funds on the line.
You might also find that your personal savings may not be enough. Starting your own business is hard and comes with new obstacles all the time. You might need to spend more than you initially estimate — and if you’ve already used your personal funds, you could have to take out a new loan anyway. Be sure to factor in extra costs as much as possible.
Assess your risk
If you’re thinking of looking into loans or other funding options that don’t come from your own pocket, it’s a good idea to assess the measure of a company beforehand, even if you’re the business owner yourself. Once you know your potential risk as an entrepreneur, you’ll be able to predict and judge how other people might look at your business as a borrower.
Using the Times Interest Earned Ratio is one simple way of assessing your company’s credit risk. The Times Interest Earned Ratio, or Interest Coverage Ratio, is a measure of a company’s ability to pay back its debt obligations, often based on its current income. It’s calculated by dividing the income before interest and taxes by the interest expense. In other words, the larger the ratio, the lower chances of getting a business loan, as it seems less likely that the business in question will pay back the debt obligations. Using tools like this to judge your own business will give you more information to help you find the right financing solution.
Look into other funding options
If you fit the criteria, looking into franchise finance can be an ideal way to seek funding for any new franchise business. Franchise Lenders. Whether you’re starting up as a small business owner or looking to expand as a franchise owner, this can be a strong option for obtaining a line of credit. They have a clear focus on franchisee pursuits and can help you cover the cost of new equipment, fresh acquisitions, or any other business costs that you want to pay back on a long-term basis. Depending on your credit score and debt obligations, this can be a smart avenue for any small business to take, avoiding starting off with too much additional debt and paying off the loan out of the company’s earnings.