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Small business owners often struggle to find a financial partner. This article outlines 4 steps that can help you secure investment for your small business. It also breaks down the different types of loans available for entrepreneurs and what their pros and cons are.
Using personal funds to support your company might help you meet your financial goals, but if done incorrectly, it can also expose you to needless risk and tax penalties. When employing personal cash in your company, follow these four steps:
1. Open a business checking account.
Separating company and personal funds is one of the most critical things a small business owner should do. Your personal assets are better protected with a corporate checking account. Furthermore, becoming a legal entity for your company gives extra security. We’ll go over this in more depth later in the essay.
Novo is an alternative to examine if you don’t have a business checking account. It’s a completely online bank that provides free automated clearing house (ACH) transactions, check generation and mailing services, and no-fee inbound wire transfers. Its application procedure is very fast.
2. Find out where your own funds come from.
You may utilize personal funds to support your company in a variety of ways. Because you’re using your own assets, each of these options includes varying degrees of complexity and danger.
The following are six strategies to invest personal cash in your business:
- Rollover for business starts (ROBS): ROBS are for those who want to spend more than $50,000 of their retirement assets to start a company.
- Credit cards: These give up to $20,000 in available credit with interest rates ranging from 11% to 30%.
- Personal loans: If required, entrepreneurs with good personal credit might use personal loans to support their businesses.
- Friends and family loans: These are perfect for friends and family who have the financial means and are eager to provide a hand in supporting your company concept.
- Cash savings: Money that is “liquid” and maybe retrieved.
Making a list of your assets, obligations, income, potential investors, and current credit score might help you decide on the best financing choice. Once you’ve finished your list, review it to see which choice is ideal for investing personal funds in your company.
ROBS
A ROBS enables you to finance your business with your retirement savings without the penalties and taxes that come with taking money out of your retirement account early. It’s a good method for you to establish, purchase, or recapitalize a firm using your own money. Because a ROBS isn’t a loan, you won’t have to make a monthly payment.
To make a ROBS profitable, you normally need at least $50,000 in a qualifying retirement account, and you should keep in mind that your retirement money is at risk. You should be informed of all the tax and legal issues before establishing a ROBS. Guidant, an experienced ROBS supplier, can give professional guidance to assist you in making an educated selection.
Using a Credit Card
Credit cards may be a convenient and affordable method to get funds. Because getting a company credit card might be difficult for a startup, you can use a personal credit card for business purposes. On whatever credit card that you use, be sure that you don’t mix personal and company costs.
Credit cards feature low-interest rates, enabling you to develop credit, and give qualifying borrowers access to promotional or incentive programs.
Home’s equity loans
For company owners who are short on cash but have considerable equity in their own real estate, home equity loans and lines of credit are viable possibilities. Both have among of the lowest interest rates of any financing option, and capital is usually available in a matter of weeks.
Because your property is used as security for the loan, using the equity in your home might be dangerous. Even if your firm fails, you’ll still have to pay back the money you borrowed.
Loans for Individuals
Because most conventional lenders refuse to lend to fledgling enterprises, many entrepreneurs must depend on personal loans. An unsecured personal loan allows you to get money fast and doesn’t demand any collateral. Owners of small businesses with acceptable credit should be eligible. Loan restrictions, on the other hand, are usually modest.
Family and Friends Loans
Your friends and relatives may be prepared to lend you money on occasion. They may also invest in your company in return for a portion of ownership. While borrowing money from friends and family may seem like a good idea, think about how it may affect your personal connections, particularly if the company fails.
Loans from relatives and friends should be accompanied by a written agreement outlining the terms and circumstances for repaying the funds borrowed.
Cash Savings
You may fund your company without taking on any debt if you have money put up in a savings account or an investment portfolio. This may be done as a personal loan to the company or as an equity investment, whichever is preferable.
While utilizing personal funds to support your company is a low-risk option, be sure you have adequate personal resources to handle any unforeseen personal costs.
3. Put Personal Money Into Your Company
You may designate your personal investment in your firm as either equity or a loan. The money constitutes a donation, and the firm does not owe you payback, since most business owners record this transaction as equity. This transaction entails you making a financial investment in the company’s future growth in exchange for a larger ownership interest.
The accounting procedure and how you obtain money back from the firm are determined by how you document the transaction. To ensure that your balance sheet and taxes are correct, make sure you retain complete and accurate records of this transaction.
4. Completely record the transaction in your accounting software
We strongly advise you to use accounting software to manage your company costs and to guarantee that all expenses and income are updated on a regular basis. These accounting guidelines can assist you to ensure that your company’s funds are properly maintained and recorded.
What to Consider
While investing personal funds into your company isn’t difficult, it is possible to make expensive blunders that could harm your personal finances in the long term. Before spending personal funds, it’s a good idea to get professional guidance so you don’t end up hurting your finances or paying more taxes later.
Consequences of Using Personal Assets
While the majority of entrepreneurs are certain that their company plan will thrive, over half of all new enterprises fail within five years. If the company fails, the owner may lose any savings, retirement money, or other personal assets they have invested in the company.
If you haven’t already, we suggest creating a solid business plan that contains information on how much money you’ll need to support your company and where you’ll get it. Using personal assets makes sense if you have enough personal assets to sustain your company and also have a reserve for unexpected needs.
What Is the Best Legal Business Structure?
A corporation, a limited liability company (LLC), a partnership, or a sole proprietorship are all examples of different business forms. LLCs and corporations have the benefit of shielding the business owner from personal accountability for the company’s commitments. Due to the procedures that must be followed, such as issuing shares of stock, moving personal funds into a corporation is more complicated, thus an LLC may be a better option.
It’s a good idea to consult with an accountant or attorney on the optimal legal structure for your company. Both will provide you with advice on the ramifications of altering the company’s structure.
Consideration of Taxes
There are a few more things to consider when employing personal funds in your company. You can’t deduct your investment on your personal taxes if you don’t record the transaction as equity or a personal loan to the firm. When the company pays you interest on the loan or you sell your ownership stake in the firm, the business may be eligible for tax benefits.
Using a Loan to Structure Your Investment
If you’re lending money to a company, make sure you have the necessary documentation in place to recognize what the company owes you and how the company will return the debt. To make the transaction lawful and to properly fill out your personal taxes, the company must make regular payments, and you must charge at least a modest amount of interest. Interest payments are shown as income on your personal tax return.
Loans give a tax advantage to the company that a gift does not. Interest on a loan is deductible as a business cost, lowering the taxable income of the company. If you lend money to your company from your own resources, however, the interest you deduct on your business return (or Schedule C if you’re a single proprietor) must be recorded as income on your personal tax return, so there’s no personal tax advantage.
Making a Financial Investment
If you contribute money to your firm as an investment, all you have to do now is make sure your money is correctly accounted for. This is to guarantee that if the firm is sold, you cash out your ownership, or the business distributes dividends to its owners, you are fairly rewarded. Any money you earn as a result of your ownership will be declared as income on your personal tax return.
Conclusion
Many entrepreneurs use personal assets to launch their enterprises, but it’s crucial to consider the hazards before doing so. It’s also critical to adhere to accounting best practices. It’s not difficult to learn how to invest in a company, but you must do it right, so contacting a legal or tax specialist when required is a smart idea.
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Frequently Asked Questions
How do I put personal money into my business?
In order to use your personal money, you would have to create a business account. You can then decide what type of company this is and the amount that goes in on an annual basis.
Do I have to pay taxes on the money I put into my business account?
You are required to pay taxes on the money you put into your business account.
Can I put personal money into my LLC?
In general, no. The LLC is a legal entity that cannot be held liable for your personal debts and liabilities.
