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Should you finance your business using Other People’s Money?

The opportunity to start a new venture is always exciting. For many entrepreneurs, one of the many challenges of starting up a business is finding capital. Fortunately, there are various options that business owners can explore such as investors, small business loans, government grants, and crowdfunding. However, narrowing down on one option that’s right for your business requires some careful thought and consideration.

There is also the option to self-fund which involves using your assets such as savings, home equity, or shares as collateral to invest directly in your business. This method of financing permits you full control over your company and independence to steer the business in the direction you want. Using Other People’s Money (OPM) may offer you the flexibility to do more, but is this the right choice for you? In this article, we’ll touch on the benefits and risks that come with OPM.

Benefits of OPM

  1. Less personal financial risk

Putting all your eggs in one basket is a risky move, and that is usually the case with self-funding. Using OPM, any amount that you borrow will be assigned to the business, not the individual. This means that if any claims were to be made against the company, it would not be made against your personal finances, posing fewer risks for you and your assets.

2. Explore opportunities that would not have otherwise been granted to you

OPM opens the door to opportunities that might not have been accessible to you before. It gives you the green light to participate in new ventures otherwise impossible due to lack of resources or capital. It also permits you the means to grow your business and break through the glass ceiling that hinders many SMEs from moving forward. In other words, instead of “I can’t afford it”, it lets you play in the game and increases your reach.

3. Buys you time and gives you the flexibility to try new things

Has there ever been a time when you were presented with an opportunity but could not move quickly enough to seize it? OPM is the means that bridges the gap between your business and that opportunity. If you were presented with a huge contract to supply goods to a third party, OPM would provide you with the resources necessary to take on the deal without worrying about how you are going to achieve it.  

Risks of OPM

  1. Shared control of your business

If you’re going to have an investor pump money into your business, then you need to be ready to relinquish some amount of ownership and control and find a middle ground where everyone is agreeable. This may also mean having to answer to someone else on the decisions you make about your business. Some entrepreneurs welcome this and view it as an opportunity to be mentored and guided by those who have been down this path before. Writing for Forbes, Ali Jamal, CEO of Stablegold Hospitality, advises for all stakeholders to communicate each other’s objectives from the very beginning so that everyone is on the same page. For other business owners, on the other hand, consulting another party may seem like a hindrance to their entrepreneurial freedom.

2. Business goals may change

You may have set goals that you would like to see your business achieve. However, with an investor in the mix, you may find yourself making new adjustments. You could be altering these goals, making them more ambitious (or less), or changing them altogether. Sometimes your business idea could take a 180 degree turn from what it was initially to something completely different.

3. It’s a big commitment  

When you agree to finance your business using OPM, it is a legally binding contract. This means that you are making a commitment to someone else for the entirety of your business operation. There will be complications should the relationship with your investor(s) turn sour, and as with most legal contracts, it is hard to get out of it unscathed.

If you feel OPM is the best method for your business, then you’ll need to prepare a solid business plan to show your company’s potential for success. There are many entrepreneurs out there seeking to use OPM, so you will need to put in the hard work to get the capital you need. If you need help, the team at FutureNow Finance can advise you on a finance option that suits your business best. Call 1300 013 730 or email hello@futurenowfinance.com.au