How Should you Fund your Small Business?

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The common assumption in small business or home based businesses is that you need to spend more to make more.  The only problem with that axiom is that the more you buy into this line of thinking the more risk you introduce to your business.  I have been reading through The 30 Second Commute : The Ultimate Guide to Starting and Operating a Home-Based Business.  In the book the authors introduce several important questions small business owners should ask:

  • What will you do for financial resources until your business begins to make a profit?
  • Will you have to use joint funds for your business start-up?
  • How will the money be replaced?
  • Will you need to borrow money to buy equipment and supplies?
  • Will it be a personal loan or a business loan?
  • Will you use your credit card(s) to make some purchases?
  • Can you separate business from personal expenses on your statement?
  • How will you make the payments?

Here’s my take:

Every penny you borrow in a business venture increases risk.  If you borrow for a business I would suggest using the same borrowing boundaries as suggested for individuals.

Though I have never gone all in (quit my full-time job) I have always dabbled in side business endeavors.  Financially, my wife and I are very conservative and have set some pretty rigid policies about debt.  This one decision alone excludes me from many, many small business opportunities.  It also excludes me from a lot of risk and potential loss of everything we have worked to build.  We have nominated my wife as the family Chief Financial Officer (CFO).  Anytime I have a bug to turn an idea into a business, she cautiously questions my ideas.  Here are some of our policies regarding money and small business:

  1. Even if one party is passionate about the business idea, both the husband and wife need to agree on the financial details. There will be much time and money devoted to this endeavor so start the process as one, not two.  Is there any business idea that is so great you should sacrifice your marriage?
  2. Decide on a loss limit. As a couple agree on an amount of your capital (money you have, not money you intend to borrow) that you are willing to ‘invest’ into a business venture.  If the business reaches that negative threshold, pack it up and move on.
  3. Let your business fund your business. Once you have established your loss limit you may need to wait and even pass over opportunities while you wait for revenues to increase.  Remind yourself that this painful patience might save your family from a financial catastrophe.
  4. The larger the financial commitment (through a loan or capital) the more prayer and patience should be involved.

What are your thoughts?  How much should a new small business owner be willing to borrow?  What is the best way to finance a new business?

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