Where should you get the money from to start your business? Should you cash in your 401k, or should you take out a loan, or should you pray that you win the lottery? If I am being honest, I would hope for the last one. However, since there is only a 1 in a gazillion chance that you’ll get money from that, let’s look at the other options.
Using your Savings
The pros for using your savings or cashing in your 401k:
- You don’t have to worry about paying yourself back.
- You don’t have to worry about paying interest on the money you use from your savings.
- If the business goes well, then the return you earn on your savings will probably be a lot more than if you left it in a savings account or mutual fund.
- If the business does not do well, then you will have lost your retirement funds or nest egg.
- Lenders might need you to provide some collateral to provide a loan. If you kept your savings intact or 401k account, you could have used it as collateral.
- Cashing in your 401K before retirement comes with tax penalties.
Taking out a Loan
The pros for taking out a loan:
- If you don’t have savings, this might be the only way to raise funds.
- If you do have savings, you don’t have to deplete them to start your business.
- If your credit is strong enough, you might be able to raise more capital than you have in savings. Note, however, that it’s more likely that you will only be able to access personal loans at first. It’s a little more difficult to get a business loan for a startup, but once the business gets going and can prove itself, it becomes much easier. Also, important to know is that your personal credit is more likely to be used to get an approval for funding at first, but this also becomes less of an issue as the business matures.
- You have to pay back any loans taken out.
- You have to pay interest on the loans.
- If the business does not do well, then you might be forced to sell off your personal assets to repay the loan if you have personally guaranteed it.
There are other options, like taking on a partner that can finance the venture. However, I will save that for another section. Overall, I think the decision on how to fund your business will depend on how much you need, how much you have available, and the risk that you are willing to take. It also depends on whether you have other sources of income you can rely on until the business takes off. Repaying debt when you haven’t generated any revenue or income yet can be done if you have some savings to satisfy it. This can give you a fighting chance if you want to save your business. However, if you use your savings instead of taking out a loan, you won’t have the stress of meeting debt payments. The problem is that, when the savings run out, you might be forced into taking on debt at a time when you are in a more desperate situation.