We’re discussing the financing of your business.  This is when you need a cash infusion to expand your business.  Make sure to catch up on Tuesday’s post to learn more about this concept. Yesterday’s post was about organic growth.

What is personal investment?

Personal investment is when you invest your personal funds into your business.  This can be money that you have in your savings, from a “day job”, your home (refinanced mortgage or equity loan), or other personal source.  Here’s an example:

Ann Smith is a new photographer.  She has been saving a portion of her paycheck from her job as a dental hygienist to buy equipment.  In 2012, she used $8000 from her personal savings to buy a new camera.

For accounting purposes, this is called an “equity investment”.  As an owner in the business, whenever you put personal funds into your business, you are investing in equity.  Equity represents the ownership of your business.

Pros of Personal Investment:
The pros are similar to those of organic growth

  • NO DEBT to pay off or burden your business.  HURRAH!
  • The original owner remains in control of his/her business.  You only have to please yourself in terms of earnings expectations.  No other owner has a say in your business decisions.
  • You show that you are putting your OWN money where your mouth is.  If you seek outside investment or bank financing later, they will usually want to see that you have put your own money into your business. Their thought is this: “Why should I invest in your business if you haven’t done so yourself?”

Cons of Personal Investment:

  • It limits your personal finances.  This can be a strain on you and/or your family.  Make sure everyone is signed onto your investment.
  • It puts your personal finances at risk.  If you refinance your home to finance your business, you put your home at financial risk.  If you take on personal debt to fund the business, then you are putting your personal credit at risk.  Taking on personal debt to invest in your business is just as risky as business debt.  As a small business owner they are usually one and the same.

Who is this method of financing good for?

Personal investing in your business is good if you a) have a growth strategy and b) set a limit.  If you invest $15000 in your business personally and you expect to see a return within one year (in addition to hitting your sales/income goals) then do it.  But, if you are investing in this business and you don’t know if you will ever see the money, then don’t do it.  ALSO, give yourself a limit to how much you are willing to invest.  The danger with personal investing is when you have unlimited access to personal funds and you end up putting you and/or your family into bankruptcy for your business venture.

What are your thoughts on personally investing in your business?  Have you done this? What is the limit that you set for yourself?