Depending on the business, utilization of personal savings as a source of financing can be achieved in a number of ways. Before going into more specifics however, it is important to note that capital invested in a business is locked in that investment until it is either withdrawn and/or yields a profit. For this reason it is advantageous to utilize one's capital in supplementation of one's business instead of sole capitalization.
The following illustrates a three-step process by which personal savings can first be maximized for optimal leveraging and application through employment of financial instruments and institutions. Second, the financing obtained in step one can be further optimized by properly applying the funds as necessitated by considering the type of business. Then, in the final step, the business itself can be operated using overhead expense management techniques that minimize start up operating costs.
Step 1- Financial leveraging
The goal here is to take a sum of money and turn it into a larger sum of money through financial instruments and business tactics. As soon as money has been invested in a business it can't be used for anything else until it yields a profit. For this reason it may be a good idea to leverage the capital before investing it in anything. A few such leveraging methods are as follows:
Business Plan Collateralized Loans: Non-secured loans don't require collateral, but rather a good business plan. The fact a business owner is willing to put his or her personal savings on the line is the first step in this business finance plan as it demonstrates the willingness to invest personally. If the lender finds the business plan achievable they may loan money without collateral thereby once again allowing the business owner to not use up the personal capital.
Small Business Seed Grants and Capital: Seed grants and/or capital may be available to entrepreneurs with demonstrated capacity to attain probable cash flow in a new business. Furthermore, depending on how strong the business model, idea and plan are, the seed capital may not require repayment in the case of a grant or have low interest rates in the case of seed capital.
Loans on Investment: If savings are invested, those funds can earn a percentage in interest and/or capital gains, and also be used as collateral for additional financing. This way a business owner isn't actually using his/her money. What's more, the returns from the investment may pay off all or part of the interest on the loan. One may also be able to obtain partial collateralization in which the savings allow one to borrow double, triple or even more than the original capital at hand.
Step 2-Maximizing capital through business type
Online lending business:
Companies such as www.prosper.com allow lenders and borrowers meet outside the confines of traditional loan application procedures and interest rates. If one wants to start a lending business, this may be a good place to start as individuals and investment groups come together and arrange loan deals for interest rates in excess of 8%.
Multiple owner business:
Many investments in businesses are made by groups of owners and/or investors. This enables the owners to pool their money and achieve more. By starting a business with multiple owners one is in effect leveraging one's own capital with the capital of others. In this case personal savings are the entry fee to a potentially profitable business.
Community based business:
If a business is to be operated with the goal of assisting certain social, community or religious needs the financing for such operation may be provided for by a parent organization. Examples of this include churches, state and federally sponsored privatization programs and fundraising organizations for social causes. While the business may not earn huge profits, it may return a stable living and with little or no start up cost.
Step 3- Overhead expense management
To reduce investments costs and operating expenses one may also utilize overhead expense management techniques. These techniques allow one to
Consignment Inventory: If the business involves inventory of any kind, it may be possible to negotiate a consignment or partial consignment with the wholesaler. Not only does this allow the business owner the opportunity to return some or all of the goods if they aren't sold, but it also doesn't require outright purchase of the inventory. This method of inventory saves the wholesaler inventory storage overhead costs and frees up savings/capital for other uses.
Space Utilization: Rent and/or building costs can be a very large expense for a business. For this reason it is advantageous to avoid this expense altogether by either working from home, finding an operating location outside the city and/or sharing space with a other businesses or soliciting space at discounted prices. Space utilization may require relocating but the pay off could mean a great reduction in monthly expenses.
There are many other expenses and methods that can be implemented to supplement and/or make the most of one's personal savings when starting a new business, The above steps are just a few of the possible approaches to starting a small business with use of one's personal savings.
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