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3 things to consider before dipping into your personal savings

38% of small business owners plan to use personal savings for their businesses this year. We asked an accountant what they should consider first.

At a glance

Here’s a snapshot of advice from our interviewee:

  • Before you do anything, assess the potential risks – there’s nothing worse than realising too late that you made a mistake.
  • Look at all your options before adding more equity. What does your business plan say? What does your budget say?
  • Keep your personal and business finances separate from the start.

If you’re a small business owner just starting out, it can be tempting to rely on personal savings to kickstart operations. Even if you’ve been in the game for a while, using your own savings becomes an attractive proposition to make a large purchase or when cash flow becomes a cash trickle. 

According to One Picture research commissioned by Prospa, 38% of small business owners plan to use personal savings to help achieve their business goals this year – and 64% of business owners who’ve been in operation less than two years.  

“Small business owners need to be mindful when blurring the line between their personal and business affairs,” Prospa Managing Director, New Zealand, Adrienne Begbie told Scoop NZ. “It can lead to issues later when funds are required to achieve personal or business goals.” 

With these potential risks in mind, we sought an expert’s opinion for anyone else considering dipping into personal savings.

A Prospa Small Business Loan offers quick access to funding between $5,000 and $100,000 for approved applications, including sole traders with 6 months’ trading history who meet eligibility criteria. Find out more and apply now.

An accountant’s advice for using personal savings

Business owners will be familiar with pressures on business finances, says Craig Gardiner, CEO of Small Business Accounting. 

“When looking at starting a new business, there are no certainties, particularly with new business ventures and especially during these trying times,” he notes. “The world as we know it has been changed in ways we could not have imagined a handful of years ago. 

“There are, however, new opportunities in this changed business landscape, and those who have visions of exploring and developing these new opportunities – and are also willing to take a risk – will need capital to get their business ideas off the ground.”

1. Assess risk

The general advice for business owners needing to rely on their own personal savings is to always weigh up the risk versus projected return before starting a new business. Risks should also be considered before injecting personal cash to cover a business shortfall.  

“You need to do a risk assessment,” says Craig. “Measure up the rewards and returns from the input of your savings. Ensure that as many factors as possible are considered and play out scenarios. Conduct ‘what-if?’ assessments with varying outcomes, as there is a significant element of unpredictability with new ventures.” 

It might even be worth pitching in alongside a business partner, suggests Craig. 

“Where possible, try to share some risk, perhaps with a business partner in a similar situation,” he says. “Ask around to see if people would be interested in your product or service, and identify and develop your point of difference to make your offering stand out.”

2. Consider all options and plan ahead

Craig has some very forthright advice on the topic of planning for businesses in their early days. 

“The old cliche is true,” he says. “If you fail to plan you plan to fail, so consider as many planning strategies as possible and think in terms of scale. You don’t plant a tree, you plant a seed – so plan according to the growth cycle of the business.” 

In other words, you should weigh up whether to rely on personal finances at such an early stage, or indeed at all. 

Similar advice applies for more established businesses considering an injection of cash to cover a purchase or new venture. 

“Look at all your options before adding more equity. What does your business plan say? What does your budget say? If you need to put more money in, will it be as a loan? If so, work on your cash flow forecast so you know when you are going to get it back.” 

All of these factors are worth considering before pitching in some cash from your own pocket.

3. Keep your accounts separate

Craig’s advice on whether to keep your personal and business activity separate, or to consolidate in the single account, is unambiguous – and useful for tax time prep. 

“Have separate bank accounts,” he says. “It pays to set up a bank account and call it your tax account, and then a separate account for the business. 

“Put one of every three dollars you make from sales into the tax account – and don’t touch it.” 

So, whether your business is in the first years of operation or it’s more mature, before joining the 38% of business owners planning to fund goals through personal finances, consider Craig’s advice: 

  • Assess risks and whether potential rewards are worthwhile 
  • Consider a business partner to share the burden 
  • Plan repayments alongside your cash flow forecast 
  • Keep business and personal finances separate from day one – or get started untangling them

Prospa’s line of credit offers a convenient and flexible source of funding that lets you make additional repayments as required, over a renewable 24-month term. Find out more and apply today.

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The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisors. Although every effort has been made to verify the accuracy of the information as at the date of publication, Prospa, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information for any reason, including due to the passage of time, or any loss or damage suffered by any person directly or indirectly through relying on this information.

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