If you are a high-achieving woman looking for ways to finance your business, there are three main ways to self-finance any business.
You can use your cash savings, borrow from your 401K or use your home equity.
All three involve different levels of risk and some experience in how to handle financial matters.
Using cash savings can be one of the simplest ways to finance your business. You have total control over your cash and if your business turns out to be a loss, you lose the money – but you aren’t required to pay interest on your losses like you would with a loan. The downside, of course is that you’re out of some savings.
The first step is to determine how much your costs will be in order to achieve profitability. Now, take the costs needed to achieve profitability and determine how long it will take for you to recover from that loss based on your previous, or current job’s salary.
If it takes longer than three years for you to recover from the loss, you may not want to use cash savings to finance your business.
If you determine that you could recover from the loss in less than three years, and wish to go ahead and use your savings to finance the business, you’re going to want to set up a separate checking and credit card account for your business expenses.
Assess your expected costs at the start of every month and put that money from your personal savings into your business checking. It’s understandable that you’re going to require more money than you anticipated on a month-to-month basis, but by forcing yourself to withdraw from savings and put into checking you’re more likely to keep your spending under control.
It’s risky to tap into your 401K to finance your business. One way that you can do it is by starting your new business as a C Corporation with no issued stock. Then create a retirement plan and roll over the 401K from your previous employer into the one you created at your new business. Now use the money to buy shares in your business.
You can also take out a loan from your 401K. Most limits are set so that you can’t take out more than 50% of your account value.
In some cases, though, you can take out 100% of your account if it contains less than $10,000. Your employer will have an interest rate set, so you’ll have to contact the employer or your accountant to find that out. From there, most 401K loans need to be repaid within 5 years.
This is a complex method of financing and it is not recommended for people who don’t have a firm grasp on financing, bookkeeping and building businesses.
If this is your first business, it’s is also strongly recommended that you avoid this method.
You can use the equity in your home to finance your business (or other projects) in a similar way that you would take out a loan or use a credit card. With home-equity, you have two options: to take out a home-equity loan or to open a home-equity line of credit.
With the home-equity loan, you’ll be given a lump sum of money that you must pay back by a certain date. The interest rates on home-equity loans are usually higher than they are on a mortgage, but lower than credit cards and other types of loans. The challenge with taking out a home-equity loan is that you must know exactly how much money you need.
If you come up short on your estimate, you may not have enough money to get your business off the ground. Equally, if you take out too much, you will have to repay the interest on an unnecessarily larger loan.
Home-equity loans are almost always offered at a fixed interest rate, so calculating how much you will need to repay the loan is less complex.
By opening up a home-equity line of credit (HELOC), you are essentially using your home equity as a credit card. You can borrow the money as you need, but you will pay a higher, variable interest rate. Opening a HELOC can be beneficial if you aren’t sure what amount of funding you will need, or if you are using the HELOC to finance an ongoing operation until your business turns a profit. For example, you might consider using a HELOC to help pay your business’s rent and utilities until you start to see profits coming in.
Make sure you choose wisely – all of these options can and will impact your future finances.© Copyright 2017 Laureen Wishom