Australian owned and operated. Supporting Australian small businesses for 10 years.

5 Things To Consider Before Dipping Into Your Personal Savings For Your Business

You decide to start a business, but you find yourself cash-strapped. So, you think about using some of your personal funds to turn things around. But is it a smart move?

Owning a business is a thrilling endeavour. It is often fueled by the ambition to turn dreams into reality. And to make it happen, you must have sufficient funding.

For many aspiring entrepreneurs, their initial capital comes from personal savings. FlairHR reports that 82% of small business owners use personal savings to start their business.

Reasonable enough, right?

However, before using your personal savings for your small business, it’s vital to understand the big picture. Consider various factors that could impact both your personal finances and the success of your venture. 

After all, it’s been reported that 20% of small businesses don’t survive their first year. And should yours become part of the statistic, your personal savings disappear alongside it if you used it as capital.

You don’t want that to happen.

With that, we’ll talk about the five things to consider before diving into your personal savings to fund your business.


The 5 Considerations

Consideration #1. Comprehensive Risk Assessment

Before using your personal savings for funding your small business, examine your current financial situation. 

Start by calculating your net worth. Furthermore, check your debt obligations and monthly expenses. This will give you a clear understanding of how much money you have available to invest in your business. 

Also, check your current assets and liabilities. Consider potential scenarios and revenue projections. This will give you an idea of how much you need to maintain the business and if it’s worth it.

Ask yourself:

Would you be able to handle it when the business takes longer than expected to break even or generate profit?

But if you’re set on using your personal savings for funding, determine the maximum amount you can invest and afford to risk. Consider the impact on your financial stability if your business does not yield the expected returns in a certain period.

Also, think about obtaining insurance coverage to protect against potential liabilities. Prepare for issues such as property damage, lawsuits, or business interruptions.

Our tip?

Maintain an emergency fund equal to three to six months’ worth of living expenses. This gives you a safety net in case your business encounters challenges or takes longer to generate income.


Consideration #2. Explore Alternative Funding Sources First

You can invest your personal savings in your business. But depending solely on it can limit your financial flexibility and increase the risks involved. 

This is why you have to explore alternative funding sources first. Not only can it decrease the risks to your personal finances, it can also help diversify your sources of capital. 

Consider the following alternatives:

Funding Source #1. Small Business Loans

According to NAWBO, banks fund 16% of businesses. The loans these financial institutions offer typically have favourable terms. They can provide the capital you need to fund your business operations while leaving your personal savings untouched.

Funding Source #2. Angel Investors

These are individuals who provide capital to startups in exchange for ownership equity or convertible debt. If you will push through with this, find angel investors who have experience in your industry. They can provide valuable mentorship and guidance.

Funding Source #3. Venture Capital

These firms invest in early-stage companies with high growth potential. And they do it also in exchange for ownership equity. 

So, what makes them different from angel investors?

While venture capital can provide significant funding, it often comes with stringent terms. It could even mean handing them control over your business.

Funding Source #4. Crowdfunding Platforms

Consider using crowdfunding platforms such as Kickstarter or Indiegogo. They allow you to gather funds from people who believe in your business venture. 

Crowdfunding also allows you to validate market demand and engage with your target audience.


Consideration #3. The Impact on Your Long-term Financial Goals

Using your personal savings for business purposes can significantly impact your ability to meet your long-term financial goals. For instance, it can delay you from purchasing a home. Diverting funds from a retirement account could mean losing out on years of compound interest. 

Find out whether or not the potential gains of dipping into your savings for funding your business outweigh these sacrifices. Consider how this decision will affect your long-term plans. Will you need to delay your retirement? How will this affect your savings for other important life events?


Consideration #4. Separate Your Finances

It’s crucial to separate your personal and business finances. This is especially true when using personal savings to fund your small business

You must conduct all your business transactions through your business account and document them. Separating them protects all your personal assets from business liabilities.

So, make sure to open a business checking account. If necessary, you can also open a business savings account. These accounts should be strictly used for business transactions. 

You can also get a business credit card to better manage your business expenses. This will also help you build your business credit history and, at the same time, keep personal purchases separate.

What’s more, separating your finances can simplify the process of filing taxes. This makes it easier for you to identify deductible business expenses. Remember, accurate and distinct records can help you avoid fines or penalties from ATO.

Finally, having distinct financial accounts enables more accurate budgeting, financial forecasting, and cash flow management. It also simplifies the process of securing business credit or loans. This is because financial institutions often need detailed business financial statements.


Consideration #5. Tax Implications

When you invest your personal savings into your small business, you may encounter several tax implications. 

For one, contributions might be deductible as business expenses, potentially lowering your taxable income. However, drawing from your retirement savings early could make you incur penalties and extra taxes.

That’s not all.

According to the Australian Taxation Office (ATO), a valid business deduction is an expense for your business and not from private use. But if the expense is a mix of both, you can only claim the portion that’s used for your business. You must also have the records to prove it in order to claim the deduction.

Given these complexities, it’s wise to consult with a financial advisor or a tax professional. They can offer guidance based on your specific situation. And they can offer the best ways to structure your investment and minimise your tax liabilities.


Find The Perfect Funding Source For Your Business

Using your personal savings to fund your small business can be a significant undertaking. As such, it requires careful consideration and weigh the risks involved. You also need to strategically plan for managing both your personal and business finances.

If you need more funding for your business but don’t want to dip into your personal savings, Unsecured Finance Australia is here to help. Apply for a loan online and you can receive your approval within 24 hours.

Find out more by taking a look at our unsecured business loans.

Share the Post:

Related Posts