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Securing investment capital is often a top priority for entrepreneurs when starting a business. Many will seek outside help, such as angel investors, private investors, venture capitalists, and peer-to-peer lenders. However, each “type” of investor poses a different level of risk. Let’s be honest, not all companies are attractive to investors.
You may need to fund the enterprise yourself. This presents the question of how much of one’s personal money should be invested in one’s business.
Advantages and disadvantages of covering the initial cost with your own funds
One of the major drawbacks of this source of funding is its over-reliance on your own cash. Few people have enough money to fund a post-launch business. Also, in the early stages of a new business, there are often unexpected costs.
Office space, equipment, software, and people are the most obvious, but you also need tax help, legal counsel, and marketing (among other services) to get your business off the ground. Your own personal funds can only go so far.
However, pouring your hard-earned money into your business can be risky on a personal level. We have a strong interest in its success, giving us the drive we need to overcome challenges and establish strong relationships with our customers, vendors, suppliers, and more.
Personal funds are also the quickest source of investment. It goes without saying that better profitability means better return on investment. Low financing fees and low principal on startup loans means more money coming back to you and your business.
A realistic personal investment calculator
Unfortunately, that number varies from person to person, and it’s not always as easy an answer as you’d hope. There are some nuances when deciding what level of upfront investment to make for your business.
Here’s how to approach the calculation:
1. Consider personal financial impact
This goes without saying, but it’s worth mentioning the potential impact of investing personal money in a new business. Take a realistic look at your own financial situation. What is your financial position with your investment? Do you have enough money in your account for a personal emergency? How much debt do you owe?
The option of using a 401(k) or Roth IRA is tempting, but not recommended. The tax fine alone should be reason enough not to go this route. You’ll also miss out on benefits associated with your retirement account. It may be wise to consult your options to better understand the potential impact on your finances. Wealth management consultant.
2. Conduct a cost estimate
Business ownership costs a lot — both in the beginning and on-going — and it’s important to arrive at an accurate cost estimate. Make a detailed list of all necessary expenses. This includes things like rent, inventory, marketing, utilities, employee salaries, and more.
Once you have your list compiled, you can start expense budgeting and start forecasting your expected costs. Some costs are easier to determine than others because you can request quotes from service professionals, third-party vendors, and more. There will be costs that require an estimate. You can consult other business owners or check industry benchmarks to arrive at a good number.
Don’t forget to factor in your personal financial “cushion” in case things go wrong or your business takes longer than expected to gain momentum. Most financial professionals, whether running their own businesses or working the more traditional 9-to-5 hours, have enough money to cover their personal expenses for at least six months. instructed to keep the
3. Run payroll
The biggest mistake you can make as a business owner is treating your business as a retirement asset. There is no guarantee that someone else will want to buy your business or will be successful enough to pull out when you retire. At first, think of yourself as an employee with many of the same perks and benefits as any other team member.
In the early stages of your business, you should allow yourself some leeway. Over time, work on benefits such as a personal savings car. It can be a solo 401(k), Roth IRA, SEP IRA, or traditional IRA.
Each has its own benefits and limitations for contributions. You may want to connect with a wealth management consultant to arrive at the best solution for your own personal situation.
4. Weigh potential risks against financial rewards
We have not yet taken into account the possibility of investing outside the business owner. This should be part of the equation when deciding how much to invest personally. Raising funds from other sources certainly minimizes your personal financial risk, but it can also reduce the financial leverage you have with your own company.
For example, you set aside $10,000 for investment and donate the same amount to personal funds.while minimizing financial riskyou also minimize both your control of the company and the financial rewards it can provide. No, but that’s for another day.
Where things can start to complicate things on a financial level is when you take out a personal loan to fund your new business. Whether the business is successful or not, that loan and interest will need to be repaid.
In most cases, a business loan is a much better option and comes with certain stipulations of its own. Lenders require a business plan, a description of how the funds will be used, and some indication of your ability to repay.
Find the right funding mix for your business
Investing in your own business makes business sense in many ways, and often the best course of action is to use some of your own personal money with outside money. After you understand exactly how much it costs to start and run your business, you’ll have a better sense of what will satisfy you when it comes to personal investments.
Remember to expect the unexpected, especially in today’s environment. You always want enough money to live on.