The Pros and Cons of Ways to Pay for the Unexpected in a New Business

Posted On:

When you start a business there are always surprises. Sometimes these are good events such as experiencing better growth than you expected. Therefore, you need to expand with a little more inventory or extra space. On other occasions, there’s bad news. Equipment breaks down or you lose your biggest customer.

Regardless of the causes, there are times when a sound new corporation needs to spend a little extra money. The most common option is to borrow from a financial institution. But that’s not the only option. You also have three other choices. These are (1) use existing cash, including personal funds, (2) get help from family or friends, or (3) get an outside investor or partner. Each scenario has its own set of advantages and disadvantages.

Using extra cash for a special business need is fine if you can quickly rebuild the sacrificed working capital. You avoid paying interest and don’t have to give up any equity in your company. But you should exercise caution in using too much cash that’s critical for ongoing operations. Make sure you can replace your cash reserves in three to six months.

Family and friends are probably your biggest supporters when you start a business. Many of them have plenty of money and want to make sure that a little bump in the road doesn’t interfere with your successful business path. They will gladly give you a little money…maybe a few hundred or even a few thousand dollars.

Taking their money certainly is cheaper than borrowing from a bank. Plus, there’s no paperwork. A few small donations can quickly add up to a considerable sum. But, think twice before you tap this network. If you create a financial strain for family or friends, you must repay them. Make sure that any financial gifts will not create a personal burden on the donor.

Raising funds from investors is worth considering if you’re willing to give up some ownership in your corporation. That’s okay if the venture has huge potential. Just make sure you get enough funds for the value you’ve already created. But you won’t get any extra consideration for an expected future value. The most important consideration is how much involvement the investor will have beyond the money provided. You don’t want a management partner if you only need the cash.