Pros And Cons Of Using Your Own Money To Start A Restaurant Business
Oct 30, 2023
Making use of your own money to fund your startup restaurant business allows you to focus on expanding your product or service first. If you do eventually try outside financing, potential financiers want to see that you are capable enough to trust with their money. They will be more willing to invest if you do first.
One of the positives, if personal money is being used, would be having control over the finances. If you are the primary funding source it will lead to an even more determined approach to ensuring the business succeeds. It also means that you are answerable to nobody but yourself.
Pro: You Will Run a Better Business
“If you have your own money on the line, you’re going to look at your business very differently, both in the beginning when you’re asking yourself how to fund my business, and down the road,” says Stephen Key, author of One Simple Idea for Startups and Entrepreneurs. You will run a smarter and better company and all the rewards will be yours, not the bank.
Pro: It’s Your Business, Your Way
What’s one of the greatest joys of financing your own restaurant business? You definitely have complete control of everything! You don’t have to deal with investors looking over your business approach asking for specific returns. Your finances, you decide how the money is being used.
However, there are downsides to this approach as well and that counts your own sacrifices. Make sure you want to pursue a business before making these sacrifices because it is an investment. It can mean putting vacations on hold, cutting back on expenses, or delaying those plans to save for your retirement or future plans. One key problem would be the uncertainty of cash flow and the business has to hit the ground running to start producing revenue quickly. The company may then have to grow very quickly and it could mean spreading everything a little too thinly. This could be a problem and restrict measured and sustainable growth further down the line.
Con: The Risk of Personal Liability and Bankruptcy
We tend to think of retirement accounts or savings nest eggs whenever we think of small biz owners whose business expenses are paid with personal funds. Using funds in retirement accounts can negatively impact business owners in the short term and in the long term. Business owners may have to pay a penalty fee, as well as taxes on the amount withdrawn when tapping into these accounts early, and using these funds may mean not being able to retire when initially planned.
In addition to using retirement accounts, many small business owners also use personal credits card or lines of credit. That’s where Emily Chase Smith, author of The Financially Savvy Entrepreneur, says many entrepreneurs get in trouble. “A lot of small business owners are taking on debt on the personal side. Let’s say they’re taking on a line of credit for their business with the bank. They have to then personally guarantee that money,” says Smith. What’s the risk of that? “If the business goes under, then the entrepreneur will either spend the next decade paying it off on the personal side or need to file for personal bankruptcy.” Those are two undesirable outcomes you need to be sure you can live with.
Con: Your Money Might Not Be Enough
Strangely, success is one of the worst things that can happen to a self-financed entrepreneur. Say you used $10,000 of savings to start your company and develop a product. Suddenly Target wants to place a gigantic order. You now must have to deliver that order. And you won’t see any money from it until 90 days after delivery. Guess what? You can’t afford to give Target what they want.
Regardless of which source of finance you choose, these pros and cons should hopefully help guide your decision to either self-finance or go with a commercial loan. It’s worth remembering some advice Smith shared with us: “No matter where you get your money from, you have to take a long term perspective and acquire some financial savvy to be a successful business owner.”
Not sure if it’s a good idea to self-finance your restaurant business?
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