Loan Or Savings? How To Fund Your Business?

February 16, 2022February 11, 2023 admin finance

Having a million-dollar idea for a new company or startup is amazing, but raising funds for it has always been quite an uphill task for entrepreneurs. There are a variety of methods you can use to fund your new venture. From personal and business loans to savings and equity, anything can work for financing. However, which one is the best of all?

Are you an entrepreneur and wondering the same? Read on to explore the pros and cons of different funding methods and choose the best for your business.

Is using Savings a good option?

Savings, in fact, is one of the best ways to finance your business. If you have saved up in advance, you can use it to launch your project. One of the advantages of funding your business with your own savings is that you don’t go into debt.

It is safe and reliable.
A great way to start and add funding from other methods later on.
It will make you appear independent, as you’d be able to say that you started off by investing in yourself.

What could be the potential cons of funding your business with savings?

Like any other method, savings has its drawbacks when it comes to funding businesses. They are:

Funding business with personal savings circumvents business financing. Therefore, you don’t really establish or increase your business credit with this option. Thus, when using personal savings for funding, it is always advisable to establish a business checking. Or set up savings accounts to channel your money as a way to neutralize this problem.
Using your personal savings is a bit risky. How will you manage if your business doesn’t work out well? Thus, it is better not to put your everything into one business. Rather, make sure to save enough that you could survive at least for 6-12 months if things don’t work out.
Savings are usually limited. Unless you’ve been saving for a long time, it will also not be enough to launch a new business. Therefore, you must ensure solid financial planning before you jump right into starting a new business.
Since saving takes time, you may have to wait for years before you really go for a strat-up. Moreover, once after launching your project, you will need investments in order to grow rapidly. So, ask yourself if you have enough money to channel the growth of your business.

Is it better to take a personal or business loan for funding?

Taking loans is not a bad idea. In fact, business loans are definitely a great option to skyrocket your startup idea. Saving could be difficult and nearly impossible, if you were already struggling to make ends meet by working. In this case, using only savings to start a company is quite a task.

It does create an ideal situation for your business by helping you to separate your business even as the only proprietor. It’s financial and legally a better decision to take. Thus, you should register your business, get your EIN, and establish your business banking accounts.

Once you’re done with all these things, you’ll easily access business loans, which will help you to:

To get a huge amount all at once.
It will be funneled through the professional channels, making favorable situations for your businesses.
The stronger and longer your business experience will be, the easier it will be for you to get business loans.

Personal loans vs business loans?

Compared to business loans, personal loans can be a bit trickier for businesses.

With a personal loan, you can find some difficulties to get good interest rates.
The pressure of debt repayments is often heavier.
You usually get less money through a personal loan in comparison to a business loan.
Repayment of a personal loan won’t help you build business credit.
Personal loans are easier to get but they come with higher interest rates.

What are the other methods for business funding?

Though savings and loans are two of the most considered ways to fund small businesses, there are some other options you can choose.

✔️ Business and personal credit cards

Like savings and personal loans, business and personal credit cards have some risk & restrictions of usage. However, it’s a good alternative, especially when you want to use it for small amounts and specific plans.

✔️Grants

Grants are great for small businesses. There are so many grants out there. You just need to find them and learn how to apply them. Sure, that’s a process. However, this is one of the best and FREE ways to fund your business.

✔️Crowdsourcing funding

Crowdsourcing funding is also a great way to finance your baby steps. You may have noticed how websites like Kickstarter were so popular for a while. Support gained through crowdsourcing brings pressure along, but it feels great. In some ways, it also pressurizes you to launch good products, especially for the people who have invested in you.

✔️Outside investors

Outside investment through seed or angel investors, VCs, etc, can bring massive funding to your business. For specific industries, like tech, it is one of the most common approaches and you shouldn’t miss out on it.