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Leveraging Personal Assets for Business Funding: Risks and Alternatives

Leveraging Personal Assets for Business Funding: Risks and Alternatives

Wednesday 15th September, 2021

Businesses leveraging personal assets to obtain a loan or some form of funding is nothing new. It often happens with small businesses that are still growing or starting out, leading the owners to use a home equity loan, pension funds, or personal funds. Sometimes this could be the available solution at hand when a new business lacks adequate collateral to secure a bank loan. However, this comes with great risks to the owner and the stability of the business. 

Risks of Borrowing Business Capital Against Personal Assets

1. Loss of Assets 

If a small business owner decides to take a home equity loan, they will use their home as collateral. Home equity loans can be much more affordable compared to other options. However, it can be a high risk. In case the entrepreneur fails to meet payments, they will lose their home.

2. Damage to Personal Credit 

Personal credit offers a leeway to access the best loans from lenders. However, when the business owner defaults on paying the loan, this negatively impacts the personal credit history of the owner. Mixing personal assets with business is a poor business principle.

3. Limited Business Growth 

Using personal savings or assets is a creative move for business owners to take when external funding is impossible. However, personal funds can quickly run out, limiting the growth and expansion of the business. This is unlike business loans, where a lender can offer a loan that meets the funding needs of the entity.

Fortunately, small businesses can still access other types of business funding without personal risk to them and their businesses. 

Key Business Funding Options for Small Businesses

1. Small Business Loans 

This brings a broad range of funding options provided by different lenders such as banks and alternative lenders. This is a great option for a business that doesn’t have enough collateral or strong credit to borrow a loan.

They include equipment loans, invoice financing, business line of credit, merchant cash advances, and micro-business loans. This is a quick and convenient way to access funding. For example, invoice financing allows an individual to borrow a loan while using their pending invoices as collateral.

2. Angel Investors 

An angel investor can inject much-needed capital into a venture in exchange for equity in the start-up or new business. In addition, angel investors come with the experience of helping start-ups to grow, ensuring their success. Since it’s not a loan, the investor will be vested to ensure they get returns on investment, further elevating the business.

3. Grants 

Small business grants are offered by the government or non-profit organizations to help businesses pursue their business objectives. Businesses in South Africa can access several grants and programs from the South African Department of Trade and Industry and the Small Business Development department. The Cooperative Incentive Scheme Business grants is a program offered by the Department of Small Business Development which targets small businesses with a minimum of 5 people from low-income communities, offering up to R350,000. Since grants are not loans, it takes the pressure off a small business and allows it to take up growth opportunities.

4. Crowdfunding 

Crowdfunding helps businesses to raise funds through a group of individuals, usually through a crowdfunding website such as Thundafund, The People’s Fund, or Uprise.Africa. It’s better than traditional funding because the business owner has to build on social proof to get support for the vision. 

Conclusion 

The possible risks of using personal assets should encourage small business owners to seek other forms of business funding. The available options such as grants ensure a business can take up new projects and manage cash flow. However, it’s important to weigh the pros and cons of any funding to ensure it meets the needs of the business and does not risk its future growth.

The way to go is to seek a partner or lender that offers affordable business funding that aligns with the vision and goals of the business, such as Betterbanc. Please contact us today to get started on meeting the capital needs of your business.

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