When Should I Use Personal Savings to Fund a Business?

Conceptually, it makes perfect sense that using your personal savings to start and finance your business is the first choice for entrepreneurs. There is no interest expense, no creditors wanting to be paid back and no awkwardness or embarrassment in asking others for money. You simply go to the bank and pull out your savings. (Hopefully, you are using a separate corporation or LLC and the money gets deposited into a separate business bank account.)

But in taking this very easy and rational step please ask yourself some equally rational questions:

  1. Can I afford to lose all this money?
  2. Do I understand that not every business succeeds?
  3. How long will it take me to save this amount of money again?
  4. How would a loss of this money affect my family?
  5. Have I thought enough about alternative ways to finance the business?


In presenting these questions we are not trying to deter you from your goals. Instead, we want you to be realistic with them.

When Will You Need Money?

Most businesses need financing along the way. They need it at the start-up phase, the growth phase and all the other phases that occur during the life of an enterprise. If your personal savings can cover every phase, good for you. (You can stop reading now.) For most of us, we need to have alternative financing methods in mind. And by learning the various financing methods we then have to ask: Should I use up all of my personal savings to get the business going? Should I consider the other alternatives so that not all of my savings are at risk?

What is Included In Personal Savings?

We should also clarify what we mean by personal savings. They do not include money in retirement accounts. Your IRA and 401(k) are savings for your sunset years. They are usually protected from creditors and the bankruptcy courts. Pulling these monies out of a protected retirement account (which can incur large penalties and fees if done wrong) may be a very bad move. If your retirement age is nearing and you don’t have enough time to rebuild depleted accounts, it could be disastrous.

Beware of charlatans on the internet claiming you can easily use your retirement money to start a business. These firms tell you that by using a self-directed IRA or a special 401(k) you can easily use your retirement funds to invest in your own business. But what they don’t tell you is that the IRS has strict rules regarding such transactions. We will discuss these issues further in Chapter 6 of my book, Finance Your Own Business: Get on the Financing Fast Track.

The bigger point here is that whether it is your personal savings or retirement savings, you may not want to go all in. You may want to use other proven strategies to finance your business or real estate investment, which are covered in my book, Finance Your Own Business: Get on the Financing Fast Track. This content is copyrighted.

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About the Authors

Garrett Sutton, Corporate Attorney & Author

Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.

Gerri

Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.