"Don't use your own/personal $$ on the business"

[tankman1989]

I've heard this saying a number of times lately and in a few different iterations such as "never use your own money to start a business". In all cases the statement always leaves some questions open as to what is really meant by the statement. Does it mean, always use an investor to run a business? That really was the feeling that I was getting from the situation b/c in most cases the person wasn't working for a company but self employed. In other situations it was an employee/owner needing to get a loan to make a "big move" in the local business.

Anyway, has anyone else heard or noticed this lately and does anyone know what they mean by this?

 

[Larry Sabo]

It's explained here: http://www.independentrisk.org/2012/09/finance-and-operations-management.html

 

[Markverhyden]

There is nothing wrong with using your own money in your business. Most small business owners, especially service types like ours, will find it extremely difficult to get third party money. Even from relatives. And getting relatives involved can be very problematic.

My spin on this is you need to manage your risks properly. Meaning you do not dig yourself into a hole you cannot get out of by, for example, getting second mortgages on all your real property to cover cash flow needs.

 

[nlinecomputers]

There is nothing wrong with using your own money in your business. Most small business owners, especially service types like ours, will find it extremely difficult to get third party money. Even from relatives. And getting relatives involved can be very problematic.

My spin on this is you need to manage your risks properly. Meaning you do not dig yourself into a hole you cannot get out of by, for example, getting second mortgages on all your real property to cover cash flow needs.

This. Of course you can use your own money. How is investing in yourself and your own business any different then other investments.

The other point of that phase is to keep your financial records separate. Don't use your home checking account to run the business. Have separate accounts and books for your home and business. If you want to invest more of your money into the business then write yourself a check from one account to the other. The same for taking out any profits. Depending on your business you might even give yourself a salary like you would any employee.

 

[Martyn]

I should think the OP means large amounts of money often putting your house up against a loan of some sort. Immediately that's pressure imho. I put money into starting my one man business off. I have no mortgage and had the money in the bank so not a lot of risk. I'm not doing this to expand any more than just me, I just created a job for myself.

 

[Larry Sabo]

I see it as advising one to use debt to finance your business, rather than only your own equity, just like buying stocks on margin. The problem with operating on margin, is that the multiplier works both ways. When the business (or markets) prospers, your return on equity is magnified; when it declines, your return on equity drops by the same magnified amount. If you don't use other people's money to finance the business, you gain/lose just whatever you put into it yourself.

 

[tom11011]

If we are talking about computer repair and support business, you can get into the business with just a philips screw driver.

I think there is some value to the statement not to use your own money, but we should be realistic about what the actual start up costs are for what you are proposing.

My theory is this- Let's say you take out a loan for $100,000 to start your computer repair business. I predict you will be out of business in a year, broke, and in debt. Why? Because you don't have a clue what to spend that money on. If you have never run a business before, its best to bootstrap and struggle. It's the only way to learn to budget.

 

[ohio_grad_06]

I agree with getting your feet wet with your own money. We have the computer repair business, but my wife also has a resale shop. I can say she's had to take out loans for the shop before as things got off the ground and times I've felt we'd never get out of debts. Getting there though, but now, based on experience, it's best if you can, to start small with your own money and as someone said, bootstrap your way. At least that way you end up in less debt and you can make more money and be happier.

 

[tom11011]

I agree with getting your feet wet with your own money. We have the computer repair business, but my wife also has a resale shop. I can say she's had to take out loans for the shop before as things got off the ground and times I've felt we'd never get out of debts. Getting there though, but now, based on experience, it's best if you can, to start small with your own money and as someone said, bootstrap your way. At least that way you end up in less debt and you can make more money and be happier.

You reminded me of something I forgot, I think it is ok to take out money or a line of credit for inventory that will be resold. Not the same thing though as using the money to launch the biz.

 

[ohio_grad_06]

Yes, just don't get in over your head. I also think as well, in the pc repair business, don't bother keeping inventory. I don't, I buy what I need as I need it. If I were to keep inventory, maybe a couple of power supplies or cheaper network cards for people who come in typically after lightning storms.

It works great for us, because we have a microcenter down the road, so we just buy all our parts systems through them, buy their 2 year warranties on parts and tell people that they are getting a year warranty, so in that case I should almost never have to take out of pocket for replacement parts, and on systems, with laptops we get there, we usually recommend people opt for the accidental plan they offer so if they drop it, spill things on it etc, it's covered.

 

[nlinecomputers]

You reminded me of something I forgot, I think it is ok to take out money or a line of credit for inventory that will be resold. Not the same thing though as using the money to launch the biz.

Unless you fail to sell it. Then you are stuck with debt AND inventory you can't move that tends to drop in value. How do you think CompUSA and Circuit City folded? By doing just that.

 

[phaZed]

IMHO, taking out a loan for anything is not the desirable option especially if you are able to do without one. If your building credit and take out a loan and know you can pay it back, that is one thing. But to take a loan out on anything other than a "sure thing" is foolish, again, IMO.

 

[CompConfig]

+1

 

[tom11011]

Yes, just don't get in over your head. I also think as well, in the pc repair business, don't bother keeping inventory. I don't, I buy what I need as I need it. If I were to keep inventory, maybe a couple of power supplies or cheaper network cards for people who come in typically after lightning storms.

It works great for us, because we have a microcenter down the road, so we just buy all our parts systems through them, buy their 2 year warranties on parts and tell people that they are getting a year warranty, so in that case I should almost never have to take out of pocket for replacement parts, and on systems, with laptops we get there, we usually recommend people opt for the accidental plan they offer so if they drop it, spill things on it etc, it's covered.

No not inventory, just cost of goods sold.

 

[frederick]

IMHO, taking out a loan for anything is not the desirable option especially if you are able to do without one. If your building credit and take out a loan and know you can pay it back, that is one thing. But to take a loan out on anything other than a "sure thing" is foolish, again, IMO.

+1

I've invested so much of my own money well after all the startup purchases were made. Why? Cause I can, and it affected no one. It's not bad to invest in your own business. Sometimes the business has money, but you don't want to touch the pot because other things are going on at that moment.

 

[MobileTechie]

It seems a ridiculous statement to make on a general basis. I can see why if you're setting up a business with very high costs, hiring offices and staff etc why you might want to borrow money to do that.

But our sorts of businesses can usually be set up relatively cheaply. So if you've got the money, why pay interest or lose equity?

 

[HCHTech]

I started out with a shoestring budget. I think my initial investment was less than $100 for tools and advertisements. It helped that I'm mobile, so I didn't have a storefront to pay for, just a spare bedroom to work in.

I just had my 10-yr anniversary, so I've learned a few things the hard way - one of which is ALWAYS CHARGE IN ADVANCE FOR HARDWARE that you order for customers. I keep some inventory, and I'm not talking about that. I'm talking about ordering 5 new computers for that great small office client you just picked up. In the old days, I would eat the cost of that and then end up carrying it for 60 days. And for some reason I would wonder why cash flow was so unpredictable.

To make matters worse, I'd get the money in finally, and cash would be tight again, so I'd succumb to the temptation to use that windfall for payroll or whatever, and I'd still be stuck with the debt! Never again - let me tell you.

So a few years ago, I just switched. Whenever someone needed equipment, I just added the phrase "Ok, I'll need a credit card for that" to the end of the quote discussion. NOT ONE SINGLE customer has even blinked at that. I can't believe I struggled with that one for so long. For new customers, I wait until the funds hit my account before I order anything.

Repeat after me....Debt is bad, mmmkay?

 

[Kaizen]

It is always least risky to start a business with saved money that you can afford to lose. For some businesses with high capital requirements it may not be practical. For the computer repair business with such a low barrier(cost) of entry, it is not needed.

Our low entry to business is both a blessing and our bane. It makes it easy for us to start a new business, but that means any one can say "I fix computers"(pizza tech) which brings our value to customers down a bit(only if you let them).

You need to always view yourself a top notch professional that is worth the same hourly rate of any other professional. When we hire employees I hammer into their head their time is valuable and customers are paying for our professionalism and that cost good money.

 

[mkeathley]

With no risk comes no reward. If you won't eat this week unless you find some customers, fix their computers and get them to pay, you are way more likely to actually do so. Now add a family to the mix. Oh yeah invest in yourself, your the only one you can rely on to do the work.

 

[ohio_grad_06]

We started on a budget also, I literally went to the local discount store and picked up like a 1 dollar set of flat and phillips screwdrivers, ended up ordering a network punch tool on ebay for 6-7 bucks which I've still got, a bag of like 100 network ends for 5 bucks or so, and a 100 ft length of ethernet cable for like 8 bucks on ebay. Literally bought most things as I went if I needed it. Worked out though.