Business Law

Should I Use My Own Money to Finance My Business?

The majority of business owners launch their operations by using their own money to get things up and running. Even if you established your business some time ago, you might encounter a situation in which it's necessary for you to invest some of your personal cash. If you're cautious, sensible, and don't absolutely have to be repaid, there's no reason not to take this route.

Use Your Money to Attract Other Money

Your business typically can't borrow money unless you've funded it with some of your own. Lenders won't gamble on your business unless you've done so as well. They often require that you personally invest at least 20 percent of the amount of money you're asking from the lender. Your business is unlikely to attract other investors if you don't have enough confidence in your enterprise to back it with your own funds.

Be Cautious With Personal Borrowing

The safest way to finance your business with your own money is to use your savings, if you have any. Short of that, you can sell assets. If you look to other sources, there are some drawbacks. If you take a home equity loan and your business fails, you could lose your home if you can't keep up with the payments with other income. Credit cards charge high interest rates. You can borrow from your IRA interest-free, but only for 60 days without risking penalties. Since sole proprietors and their businesses are the same legal entity, taking on personal risk doesn't make much difference for them. Those investing in other entities, however, put their personal finances at risk when they borrow in their own name for business purposes.

Document the Transactions

No matter where you get the money to invest in your business, carefully document the transaction. Treat it like a loan that your business is responsible for paying back. If you're investing in a partnership, write up loan documents and have all partners sign the agreement. If you're a sole proprietor, put the money you&'re lending your company into a separate business account to help you keep track of it.

You Might Not Get Your Money Back

There's always the potential that your business won't be able to pay you back. It doesn&'t have to fail. It just might not generate enough income that it can meet overhead expenses and make loan payments to you as well. If you're drawing a paycheck and you're happily self-employed, this might not bother you.However, if having personal savings against a rainy day or retirement is a concern for you, you might want to limit your own cash contributions and look for other means of financing your business.

A Business Lawyer Can Help

The law surrounding financing a business with your own money is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.

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