Funding your business personally

This posts looks at funding your business personally.

•  Savings
• Pension led funding
• Friends and family
• Personal loans and credit cards

So, there is a good argument that you should use your money before asking anyone else.

There are different types of savings, examples are:

• Cash
• Savings accounts
• ISAs
• Cashing in endowment policies
• House equity

When considering savings it can be useful to think of putting money into your own business as just switching money from one asset to another. It is still your money.

But, rather than in a low risk environment your money is in a higher risk investment; your business.

The great thing about using your own money is you don’t have to go cap in hand to anyone else and it is quick.

There’s also the bonus of not starting out in business with debt, or giving away a large percentage of the business for a relatively small amount of money at an early stage.

There is another advantage too – if you want to pump more cash into the business later on, the bank and investors often like to see you’re committed to a venture by putting your own money behind it.

The pros of using your own savings are:

• You get all the profits and retain control
• You don’t have any interest repayments or loan charges (unless remortgaging your home)
• It demonstrates your commitment, which can influence financiers at a later date

The cons of using your own savings are:

• You are using up cash reserves that could be useful if your business hits a rough patch
• Assets used to raise money, like your home, are at risk if you don’t keep up repayments
• There can be a lack of due diligence and accountability.

Next is Pension led business funding.

This is where a business owner sets up and uses their own pension fund to provide finance to their business.

The two main vehicles for this are Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs).

Business owners can set up their own schemes and transfer funds in from their existing pension fund.

You will need advice and support from an Independent Financial Advisor. And, the fees will usually be around £2,000.

Once the pension funds are in the business owner’s own fund there are two main funding options:

• A commercial loan from the pension scheme to the company
• The purchase of a qualifying asset

The most commonly recognisable qualifying assets are Intellectual Property like patents, trademarks, designs, copyrights, databases and domain names.

Developing an Intellectual Property pension-based funding strategy requires comprehensive pension review and assessment of company accounts, track record and business plan.

The pros of using your own savings are:

• There is control because it is funding by the directors for the directors
• As well as injecting fresh capital into the business, the Intellectual Property is now held within a creditor-protected pension environment.
• Any increase in the value of the Intellectual Property, or income derived via lease/licence agreements, is free from direct taxation.

The cons of using your own savings are:

• Pension-led funding is not generally viable where available accumulated funds are below £50,000.
• If a business owner doesn’t have a large enough pension pot available to make the process viable, then this form of funding is a non-starter.
• If the business is not successful the business owner can be left with no or very minimal pension provision
• The fees and loss of pension growth can be an expensive way to fund the business

All small businesses are family affairs, when you go into business on your own you family actually comes with you.

Support and encouragement from family and friends is part of our culture. And, for small businesses, family and friends are often a good source of funding.

Funding from family and friends is a cost-effective, popular source of both short and long-term finance. According to the Family Business Network up to 75 per cent of UK businesses are funded in this way.

While family members tend to be more flexible on interest rates and security than the banks, they shouldn’t be seen as a ‘last resort’ funding choice.

If the bank won’t support your idea, are you really prepared to let your family invest?

Be honest with them about the potential risks involved, if your business fails your family may lose their money.

Produce a full business plan and perhaps pay for an independent accountant to critic it.

Keep in mind that funding from family can be a way to reduce Inheritance Tax. This can be a gift, a loan which is written off over time or buying shares in a company which are exempt from Inheritance tax.

The pros of funding from family and friends are:

• It can be easier to get the attention, time and money from family and friends.
• They may require less security, lower interest and more flexible repayments than a bank
• You keep the profits within your family

The cons of funding from family and friends are:

• There is the potential of family conflict if the loan details are not clearly understood
• The whole family may lose money
• Family members may want involvement with the day-to-day running of the business
• Investors may need to request access to their money sooner than you had both planned

The next source of personal funding for us to consider is personal loans and credit cards.

Personal loans can be easier to obtain than business loans or overdrafts. And, the interest charged on personal loans or credit card when the money is used in the business is tax deductible.

It’s not the ideal way to start your business but many entrepreneurs have successfully funded the early stages of their venture this way. The most famous in Google who used credit cards in the mid 1980s.

The pros of personal loans and credit cards are:

• The ability to retain maximum equity means the less you need to give away when you take large funding.
• The ability to escape interest for over a year on either upcoming purchases or funding expenses already incurred would certainly help your business’s bottom line.
• Credit cards are unsecured and allow you to draw down money when you need it.

The cons of funding from family and friends are:

• Start ups are inherently risky, and when you use personal loans and credit cards you are gambling with your personal credit score.
• Debt collectors will after you personal income/assets to recoup what you owe.
• The potential to spend more than you can afford to pay back is not unique to credit cards.  But misuse of any small business funding vehicle can put you in the hole, which is why you should handle them with extreme care.

That brings us to the end of funding the business personally, next we will look at a range of other options.