Should I use my own money to start a business?

Key takeaways

  • Quantify upfront how much money you will need as part of your business plan.

  • Self-funding your business can be a lonely road.

  • Dipping into severance and retirement pay outs is risky as there’s no guarantee of business success.

  • Protect your personal assets against creditors by selecting the right business structure upfront.

  • You can recoup your investment in time, as long as it doesn’t impact negatively on the business operation.


Launching a new business takes blood, sweat and tears. It also takes money. One funding option is to self-fund your venture, using only your personal savings.

This is also known as bootstrapping as you will be “pulling yourself up by your own bootstraps”, hoping to achieve success on your own without external investment.

Once you start generating profits, you will typically need to plough these back into the business to fund growth.

Bootstrapping puts you firmly in the driver’s seat of your business, but the drawback is that you’re all alone.  Remember that it takes a diverse range of skills to operate in a competitive environment, attract new clients or customers and build the business to success.

The pros and cons

Pros Cons
You have 100% ownership and control.
Funding your own business can be a strain on your personal finances and put your family’s finances at risk if the business fails.
With your own money on the line, you’ll spend very carefully. You won’t have the advantage of mentors or business advisers, which you may have if you obtain financing.
You have full control over business decisions and direction. You may not have enough capital to ensure that the business succeeds and piecemeal funding can limit the growth of your business.
You will be incentivised to create a business model that will generate cash flow as soon as possible as there is no financial buffer. With limited connections or networks it can be hard work getting your business off the ground.
You will have less admin and spend less time trying to secure funding, at least in the early stages of growing the business. As the business becomes profitable you can receive the bulk of your remuneration in the form of repaying your shareholder loan. This will not be taxed as income because the loan you made to the business was with your after-tax savings.


How much money will you need?

Deciding on whether or not you can bootstrap your business hinges on how much it will cost. You need to do a detailed cost estimate which should form part of your business plan.

Once-off costs include equipment, furniture, inventory, signage, product development and website development. Then there will be ongoing expenses such as rent, travel, marketing, staff costs and insurance, which will need to be funded until the business generates sufficient cash flow to cover these costs.


Facing a shortfall

You may find that your savings alone aren’t sufficient, so you will need additional funding. Using a credit card or personal loan is expensive due to high interest rates and you will have the added strain of monthly repayments. Read more: What does credit cost?

There are some options which are interest free, such as using your severance package to start a business if you’ve been retrenched. This can be a smart decision as you’re investing in a future income stream, but you also need to consider the opportunity cost of doing this. If you had invested this money instead, what return could you have received, and what income could you have drawn from it? Read more: How can I make the best of bad financial situation after retrenchment?

Using your pension fund money, whether you’ve resigned or been retrenched, is very risky. Your business has no guarantee of success, so you’re gambling with your retirement. Read more: Why is withdrawing from my retirement fund a bad idea?

Increasing your home loan to fund the business is also very risky as you could lose your home if the business fails. In addition, you will incur extra interest on the loan.

Borrowing money in your personal capacity means you’re no longer bootstrapping in the true sense of the word and you lose some of the great advantages. For instance, you may lose 100% ownership if you borrow money from family or friends as they may request a share in the business in return.


Recouping your investment

As the business grows you may be able to withdraw funds, as long as there is sufficient capital for the business to continue operating. The legal structure of the business determines how these withdrawals are made:

  • Sole Proprietor or partnership

The money you invested is classified as owner’s / partner’s equity and can be taken as drawings, either when needed or on a regular basis.  All profits are added to the owner’s / partner’s equity and forms part of the funds that are available for drawing.

  • A personal liability company (Inc), a private company (Pty) Ltd, a public company (Ltd) or non-profit company (NPC) or close corporation (CC)

In this case, the money you invested is considered a loan to the business.

You should draft a business loan agreement to outline the interest rate charged, how it will be repaid and the consequences of non-payment.  You can lend the money at no interest if you want to and you are regarded as a creditor of the business like any other creditor.

You will not pay income tax on loan repayments received, but interest received forms part of your taxable income. Once the business generates a profit (excluding a non-profit company (NPC)), dividends can be distributed amongst the owners, which are taxed at 20%.

It is advisable to consult an accountant to fully understand the tax implications before deciding on the business structure.


Safeguarding your assets

An important consideration is protecting your home, savings and other possessions from business creditors. If you are a sole proprietor, the business is not a separate legal entity. You are responsible for all the business debts, so your personal assets could be liquidated to cover any debt.

The same is true for a partnership as well as a personal liability company, where the partners, shareholders and directors (past and present) are responsible for any debts of the company.

If the business is a separate legal entity such as a private company, public company or non-profit company or a close corporation , shareholders and employees are not liable for the debts of the business. Directors could be held liable if they are negligent in their duties and not acting in the best interest of the company.

It’s also important to note that savings in a retirement annuity (RA) are safe from creditors, irrespective of the type of business you own.  Read more: How do retirement annuities allow me to create my own retirement savings?