Choose the right finance when starting a business
Advantages and disadvantages of using your own money to start a business
If you're starting a new business, it's likely that you'll have to put up at least some of the money yourself. It can be difficult to borrow from a bank or attract other investors unless you're also investing some of your own money.
The easiest and most cost-effective way to provide your own financing for a new business is to use your personal savings. However, this can be risky, and you may not have enough to cover all the funding you need. You could also consider:
- getting a mortgage - or a second mortgage - see commercial mortgages and lenders
- borrowing privately - see financing from friends and family
- getting an unsecured loan, or borrowing on credit cards - see bank finance and advantages and disadvantages of using payment cards for purchases
- selling possessions or assets
You should always think carefully before borrowing any amount of money and should always aim to match the financing to your needs. For example, using credit cards for long-term expenditure can be very expensive, while some loans can be inflexible - you could end up paying interest over many years.
Advantages of self-financing your business:
- You will know exactly how much money is available to run your business and you will not have to spend time trying to secure other forms of funding from investors or banks.
- Self-financing your business gives you much more control than other finance options. It also means that you don't need to pay back or rely on outside investors or lenders, who could decide to withdraw their support at any time.
- You will retain full ownership of the business, which in turn means that you will receive 100 per cent of future profits.
- If you fund a business yourself, you will be forced to live within your means, only investing in business equipment and marketing when you need to. This can help you to prioritise your business expenditure and avoid excessive spending.
Disadvantages of self-financing your business:
- Using your own money to finance your business may put a strain on your family and personal life. You may not have enough money left over to cover your living costs. You should try to leave a contingency fund, in case you need extra money to see you through a difficult period.
- If your business were to fail, you could lose your home and other personal possessions.
- Many investors and venture capitalists can also provide mentoring and networking opportunities for you and your business - if you fund your business alone, you will have to develop your own contacts and mentoring opportunities.
To explore other options for financing your business see business financing options - an overview.
Watch a video that outlines business finance options that may be available to you.