How to Fund a Business through Personal Savings vs. Friends & FamilyAbbakin
As an entrepreneur, you can fund a business through personal savings, small borrowing from friends & families and credit purchase from suppliers.
Raising money to start or grow a business is one major challenge that affects many entrepreneurs.
However, there are many sources of business finance you can pursue strategically to get the funds you desired.
Personal savings, small borrowing from friends and families and credit purchase from suppliers are some of the viable options you can try while raising money for your small business.
How to Fund a Business through Personal Savings
Personal saving is one of the easiest yet often overlooked sources of financing available to most entrepreneurs.
Personal savings should be considered the primary source of funds for startup businesses.
This is because funding from external sources can be hard, particularly in the early days, so relying on your own resources is a good bootstrap.
Even if you are planning to get a business loan, most lenders will require that a reasonable percentage of your money be invested in your business.
In fact, if you have not contributed own cash to your business, this is an indication that you will not work hard to make the business a success.
Below are some examples on how to fund a business through personal savings:
Funding a business yourself successfully can take several different forms. The approach you take is determined by your financial status.
If you have a healthy balance in your savings account, this is the most obvious source to draw funds from.
Have you started savings for your business?
What percentage of your personal savings should you use?
Should you pour your retirement funds into your new business?
The advantage of using your savings is that there’s no cost for using your own money.
If you haven’t started already, get financial agencies that offer great savings options like our Target Savings Accounts with interest.
Abbakin highlight the best savings accounts based on high interest rates, secure technology, reward programs and great customer service.
Relying only on your savings may not be enough to fund a business, especially as it grows larger.
With business loans often hard to secure, many entrepreneurs rely on personal debt instead.
This could be anything from taking out a home equity line of credit or making business purchases on personal loans, assuming you have a good credit history.
But you need to pay particular attention to interest rates on the credit, and making sure you do not borrow more than you can afford to payback.
Business Cash Flows
Another self funding method is the use of the business cash flow.
Once the business is up and running, it will start generating profits and cash that can be plunged back into the business.
If the company is doing well, this money can be enough to fund any investments you need to make for your business future.
This kind of “Organic” growth can be very effective, and is a low-risk, low-cost strategy.
But unless the company is very profitable, relying only on business cash flows can result in slower growth.
How to Fund a Business through Friends and Family
Another easy source of self funding for your business is short term borrowing from family and friends.
If your own personal resources aren’t enough, you could go into partnership with friend or family members who pool funds into your business.
Going into business with someone you know so well can be a great way to fund a company, but it can also put emphasis on your relationship if things don’t work out as planned.
You are most likely familiar with a straight loan (debt) where the lender only gets an interest rate and fees from the profits made.
Sometimes such a discussion arises with friends and family who want to be your partners.
Your family and friends will naturally have interest in the success of your business if you take the time to educate them about the risks and reward of the business.
However, it is important to note that people always find it hard to obtain funding from family and friends due to the ways they approach and management the situation.
For example, asking your husband, sister or uncle to “help or assist” you by giving you some money for your business is not just enough.
You have to ask them for repayable loans or offer them equity (investment) opportunity in your business with dividends.
Tell them what they will gain in a day, every week, or monthly rather than expecting free cash.
It shows that you are committed and ready to take up the business.
If you are passionate about your business and your have committed your personal savings from day one, you will find it easy to obtain additional funding from your friends and relatives.
How to Fund a Business through Credit Purchase from Suppliers
Your suppliers and vendors can be great sources of your business finance.
As a startup business, you can purchase goods on credit, and then after you finish selling them, pay back to the suppliers.
Although funding a business through credit purchase from suppliers really depends on your relationship with your suppliers or vendors.
Think about discounts which may also be offered by suppliers on sales of goods to attract new buyers.
Purchases along with any payables in the case of a credit purchase are good means of raising investment for the business.
Credit notes for purchases, record books and good accounting system for trade payables are usually important in this kind of business financing.
Examples of Financing from your Suppliers:
- Longer payment terms
- Advertising and marketing assistance
- Furnishing or financing of equipment, signs or inventory.
- Advertising and promotional programs
- Bartering – which is to trade by exchange one commodity for another; this can also provide a source of financing if you can make good use of this.