Should You Use Other People's Money to Finance Your Small Business?

The Pros and Cons of Using Other People's Money In Your Small Business

small business funding
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It can be extremely challenging to find the money to start a business. In fact, this is one of the biggest hurdles most entrepreneurs face. There are many options -- small business loans, investors, small business grants, self-financing, crowdfunding -- but the process of zeroing in on the one funding option that is best for your business may not be a clear cut process.

So, what are some things you should consider when you’re looking for capital to start your business?

 The biggest question is: should you fund your business yourself, or should you use other people’s money (OPM) to get your business off the ground? Here is a look at each option.

Self-Financing vs. Other People’s Money

Self-financing is one path of small business funding, and it includes using your savings, home equity, stocks, bonds, 401k/retirement accounts, and credit cards to fund your business. When you go this route, you are very likely to use some bootstrapping techniques to get more bang for your buck. The problem with this is that you may not have enough liquidity to move at the pace you want. And most importantly, it’s risky. You are completely on the hook for the success or failure of your business when you do it alone.

Other people’s money is the second path. It comes in many forms including bank loans, investors, family and friends, venture capital and angel investors, crowdfunding, and vendor financing/leasing.

Why Using Other People’s Money Works

There are many benefits to using other people’s money to start your business, including less personal financial risk, the potential for guidance and advice from someone who has been down this path before, and often a better chance to build a viable and growth-oriented business.

Using other people’s money also buys you time and gives you an opportunity to do things in your business you may not have been able to do if you financed it yourself. You have more options, increased reach, and the ability to make a bigger impact much quicker as you start your business.

Reasons Not to Use Other People’s Money

I bet that sounds great, doesn’t it? It sure does! But before you head out to look for an investor, consider these reasons not to use other people’s money.

The biggest reason some entrepreneurs avoid using other people’s money is that they don’t want to lose control of the business. In most cases, you will typically have to relinquish a significant amount of ownership and control. You’ll have someone else to answer to and the decisions to be made are no longer just your own.

This also means your business goals will likely change, and sometimes even your business idea itself will morph into something larger, or just completely different. This can actually be a good thing, but you have to be open to this type of change and flexible enough to adjust the big picture you had before.

Another reason using other people’s money is dangerous for small business owners is that you are making a lifetime commitment to someone else — lifetime of your business, that is.

Getting external funding is like a marriage; it’s structured and it has legal ramifications. It can be very hard to get out of it if the relationship goes sour.

If these reasons aren’t enough to turn you away from using other people’s money to start your business, then you have your work cut out for you. The competition for other people’s money is fierce, so make sure you have a solid business plan in place and that you’re ready to put in the elbow grease to locate the capital you need.