Thursday, August 25, 2011
Are your personal finances paying for your business?
The saying goes, "never mix business with pleasure" but whether we like it or not, in order to maintain a business through hard times, we have to use our personal finances. When you started up your business you did not have a business credit history so they needed some means of judging your ability to repay loans. In fact, you could not even get your start-up loan without investing some of your personal savings into the business because the lenders like to see your level of commitment and this is best measured by your financial contribution. The trick, as your financial advisor would have told you, is to reduce your risk through careful planning, only using capital that you can afford to lose or by using a mortgage calculator with money supermarket, accessing money in your house. The thing is, now that your business is up and running, the hard times have kicked in and you are not making ends meet as you were when times were better. Before describing any personal financing of business, it is important to state that any personal loans taken out to fund your business will have to be paid back in full even if your business collapses. If you have taken out personal loans to the extent that you are declared bankrupt and you cannot pay back the loans, you may lose any personal assets and that includes your house and car. With the above in mind it is important that you carry out an honest assessment of the likelihood of your business improving in the short to mid-term. A personal loan or the investment of personal finances into a business that is past the start-up period is not a solution that will save a failing business in the long term. Sometimes the best and hardest thing to do is to close down. If, however, you are facing a short-term cash flow problem, or you are in a clearly defined development period, then using personal finances may be a viable option. Ideally, you would only use your savings and not incur greater debt for your business. This may not be possible so another way of raising money is to access some equity in your home or to take a personal loan. The last and worst option is to incur credit card debt. Using a mortgage calculator with money supermarket, for instance, will help you assess how much you can access, which in turn will help you plan how this money is to be spent. It is essential that the loan forms part of a plan and that there is clear documentation from the business that you, the entrepreneur, is lending the money to the business. It will need to be repaid with interest and the lines of personal investment and business investment must be seen to be clear. The plan should include a forecast for when the business should become profitable, exactly what the funds are being used for and other money saving initiatives that you have instigated. It is a good idea to include some thoughts as to other avenues of credit in the long term planning such as banks or capital investors. These third parties will be interested to see how your cash flow problems have been solved up until now and may even insist that your loan repayments form a part of your share of the return. Avoid using personal finances for business funding. If there are no other options in the short term, make sure that you have a plan and that you are using the money carefully.