If you are thinking of starting your own business, whether as a private company or anything else, then one of the first priorities will be to correctly identify the funding channels. These funds can be raised either from a personal or a business funding source. Money that you obtain or raise in your name is personal funding. Meanwhile, money that is raised in the name of your company is business funding.
And when it comes to personal funding for starting a business, there are three popular options– funding by oneself, from family and friends, and bank loans. Below, we look at each of their pros and cons in brief detail.
Now, the benefit of using own funds for starting a business is obviously the fact that you don’t owe any debt to anyone, not to your family, friends, banks or other third parties. However, the downside is that in case your business suffers a loss and you have to wind up, you can be left penniless. As such, when starting a private limited company, it is recommended that you don’t fund the business with all your assets. Instead, use some of your funds, and source the rest from other options.
However, a negative effect of sourcing funds as a loan from close relationships is that if you are unable to repay the money, then the relationship can go sour. So, think twice about raising money from friends and family, and only accept them if you are very sure of repaying it back.
The disadvantage of bank loan is that you will have to pay a fixed interest rate during the entire loan period. And since you have taken the loan in your name by mortgaging your asset, you will be required to repay it in full even if the business flops, else the bank will sell off the asset and recover the amount. And in case they are unable to recover the full loan amount, then you will have to make it good from your other personal assets.
Own Funds
The first place everyone looks for when starting a business is their own funds. Your bank balance can act as your immediate capital. And if you have gold, you can sell it off and raise additional cash. Assets like land or property can also be sold off to raise money, even though they will take a longer time than gold.Now, the benefit of using own funds for starting a business is obviously the fact that you don’t owe any debt to anyone, not to your family, friends, banks or other third parties. However, the downside is that in case your business suffers a loss and you have to wind up, you can be left penniless. As such, when starting a private limited company, it is recommended that you don’t fund the business with all your assets. Instead, use some of your funds, and source the rest from other options.
Funding From Family and Friends
The next source of funding you might look into is from your family and friends. The benefit of such funding is that you may not have to pay any interest in case you are taking it as a loan. And if you induct them as members of the company, they essentially become shareholders, and you never have to bother about repayment.However, a negative effect of sourcing funds as a loan from close relationships is that if you are unable to repay the money, then the relationship can go sour. So, think twice about raising money from friends and family, and only accept them if you are very sure of repaying it back.
Bank Loan
Another source of funding is through a bank loan. If you have an asset you can mortgage, like a plot of land or your existing home, then you can easily raise capital for your business. The big benefit is that you do not have to sell off your asset. You can recover it if you repay the loan in full. As such, if a land you have mortgaged triples in value within 2 years, you can literally sell off the land and clear off your loan, while pocketing in the profits from the sale.The disadvantage of bank loan is that you will have to pay a fixed interest rate during the entire loan period. And since you have taken the loan in your name by mortgaging your asset, you will be required to repay it in full even if the business flops, else the bank will sell off the asset and recover the amount. And in case they are unable to recover the full loan amount, then you will have to make it good from your other personal assets.
Author’s Bio
This article has been submitted by Ben, who has been long associated with leading Outreach experts such as SubmitCore as a freelance finance niche writer.
Ashutosh Jha
Ashutosh Jha is a professional blogger, Blog and IT Consultant. He writes about Blogging, SEO, Making Money, Internet Marketing and Web Design.
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