Should You Use Personal Savings to Fund Your Business?

Posted by on January 26, 2011 in Business Management, Business Start Up Advice [ 1 Comment ]

invoice-factoringSurely it would be better if you could fund your business from your own pocket? Not only would you keep full control over it, you’d also reap the rewards when your business succeeds. You wouldn’t have to share the profits with anyone, or have anyone interfere in your plans.

It’s certainly tempting to use your own savings to finance your business, but before you do you should understand the full implications. Most importantly, you could lose all of the money you put in. It might have taken a long time to accumulate your savings – could you save that amount of money again? What were you planning on doing with the money before? Maybe it was for a holiday, a new house, a college fund or your retirement. Most people have plans for the cash they’ve saved, and if you lose it those plans are no longer viable. Think about how this would affect your family relationships and how much stress it would put on your home life.

It’s a harsh truth, but the majority of new businesses fail. Even if you do everything right bad market conditions may mean that you don’t stand a chance. Using your personal cash to fund your new business is a very risky venture, especially when there are alternative methods of raising funds.

One way is to sell your assets, such as car or perhaps a property. Just like with your savings however, you need to think about the personal impact of this on your lifestyle and family life. An alternative is to borrow the money from a bank as a personal loan. Because you’re responsible for it however, the loan repayments don’t depend on how well the business is doing. If your business fails, you’re still liable for the loan.

Invoice finance is an option that doesn’t affect your personal finances, and may be available if your business sells B2B on credit terms. When you make a sale, you can raise cash against your invoice, meaning that you have cash in your pocket before your customer even pays. If you sell to the public you won’t be eligible, but for those who specialize in B2B sales it’s a great option to minimize personal risk, whilst maximizing cash flow.

How does factoring work?

If you decide to use invoice factoring, the process is very straightforward. You raise your invoice as normal, but send a copy to the factoring lender as well as to your customer. The factor then pays you a pre-agreed proportion of the invoice, usually around 80-90%. The factor collects full payment from your customer, and pays you the remaining balance less any fees. If you’d rather collect payment yourself you can, but many companies prefer to hand their sales ledger over to the factor so they don’t have to worry about chasing payments.

Factoring allows you to raise cash almost instantly, instead of having to wait 60 or even 90 days for payment from your clients. Perhaps the best advantage of factoring is that the more invoices you raise, the more cash you can raise straight away. Your factoring company can also provide you with sound business advice – of course, growing your business is of interest to them too! This is why factoring is such an attractive option for small businesses and start-ups – it offers instant cash, outsourced management of your sales ledger, and puts you in touch with experienced business experts who are on hand to help.

This article was written by Kedisha from Touch Financial, the UK’s largest independent invoice factoring broker

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