There are plenty of reasons why your small business might need more funding. From investing in inventory or new equipment, or simply to cover a cash shortfall, sometimes you need more than what your cash flow can provide. It’s great if you have cash reserves in your business savings account for just such an occasion, but what if you don’t?
For too many small business owners, the fast and seemingly simple solution is using personal funds to cover the difference. Tapping into retirement accounts, drawing on a home equity line of credit, liquidating personal assets, or reducing your compensation may seem like a quick fix, but it can put your personal finances in jeopardy.
Startup? Personal savings might be your only option.
In Truist’s 2021 study of small business owners, 65% of business owners reported using personal savings to start their businesses.Disclosure 1 Why? Most new businesses lack the equity to borrow funds and don’t want to give up the amount of ownership that equity investors demand. That leaves little choice but to start their new ventures with personal funds.
But once you’re beyond startup, there will almost surely be a time that your business will need funding to cover a short-term need or a longer-term strategy. As your business matures, you’ll have other options—even more than you might suspect. By carefully guarding your personal finances and having a plan, you can find the cash your business needs.
Make a plan. Protect yourself.
For more established business owners, it’s essential to have a clear view of your finances—business and personal.
Start with a realistic assessment of how much of your personal resources are already committed to your business. Note the total amount and whether it comes from your personal savings, retirement funds, mortgage, personal lines of credit, or credit cards.
There’s no right or wrong amount of personal assets to have invested. That amount varies by business, development stage, owner risk profile, and other factors. But remember, if you’re counting on the business for compensation and livelihood, investing more cash increases your risk if your business hits tough times.
Evaluate your needs—and your options.
Start by considering the nature of your cash need. Is it a short-term bridge to cover a temporary gap? Or a bigger need to help you extend your reach toward more growth or profits? How strong is your current financial position? Can your current cash reserves cover your needs?
In our study, the average business reported having 3.7 months of cash reserves, and businesses that didn’t previously experience cash shortfalls had 5.9 months of reserves.Disclosure 1 These reserves are supposed to be used for your business and are a great option to cover expenses and make investments. Just avoid the temptation to draw them down too far in case you have a financial emergency.
Need more than what you have in cash reserves? It’s time to consider your options.
- Equity investment from outside the business — Venture capitalists, angels, or other outside parties can offer flexibility and access to expertise, but you may have to give up some control or future profits.
- Borrowing from your primary bank — If you can meet collateral or equity requirements, a loan through your bank can be a great option.
- Borrowing from other lenders — There are many ways to borrow in today’s market, and they vary in application process, speed of decision making, terms, and cost of funds. Some sources to consider include Community Development Financial Institutions for community businesses, online lenders that offer quick decisions for smaller loans, peer-to-peer lending sites like Funding Circle or CircleUp, or crowdfunding through a site like Kickstarter.
- Owner funding — Owners who aren’t financially overcommitted to the business may see an additional personal cash infusion as a way to invest in themselves while maintaining a high level of control of their business. Make sure to document your own investment for reporting and tax purposes, and to ensure you’re still maintaining proper separation between your business and personal finances.