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Using personal savings as capital?

By Winnie Makena | November 4th 2020 at 00:00:00 GMT +0300

One of the most important decisions to make at the start of your business is where to get funding. Should you dip into your personal savings, get a bank loan or search for an investor? A 2020 Kenya survey by Viffa Consult revealed that 43 per cent of business owners prefer owner savings as compared to 21 per cent that receive it from family and friends. Only 9 per cent use business profits to get operational capital. Since 2016, SMEs have had to grapple with uncertainty in the business environment namely elections in 2017-2018, the interest rate cap in 2016-2019, heavy government local borrowing, delayed payments, drought in 2017-2018 and now the coronavirus pandemic in 2020.

The survey further provided insights that SME growth may continue to stagnate due to overreliance on business financing through savings, profits and family and friends which are not only limited in terms of ticket size but are also short-term. 

Advantages to using personal savings

 Off the bat, it is easy to identify the advantages of using your own money:

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Reduced interest. If you take a bank loan for instance, you will have to pay an interest rate on the principal. Additionally, loan payments will have to be made whether or not the business has started turning a profit. 

 Retain full ownership. When you seek investment from a venture capitalist or an angel investor, you have to dilute your shares of ownership instead of fully owning the business. The investor owns a stake of your company. That is what happened to Facebook’s co-founder Eduardo Saverin, who had his initial 50 per cent stake reduced to 5 per cent.

 You can pace yourself. If you want to start your business even right now, as long as you have the money, you can do it. If you depend on a personal loan, you are looking at weeks or even months of loan processing.  Self-financing means there are no loan applications to complete, no lenders to visit, no paperwork to prepare and no interest payments to make.

 Money discipline. If you find it hard to ‘live within your means’ this is the perfect challenge to enforce a new habit. Meeting needs for your business from your savings will force you to spend the money only on necessities. There is a tendency to overspend when it comes to venture capitalist funding. For example, in the dot-com bubble of 1999, fashion company Boo.com burned through $188 million in just six months, spending money on luxury offices, first-class plane travel and five-star hotels, and then filing for bankruptcy in May 2000.

Disadvantages of self-funding

 Conversely, using your own money as a major investment in your business may have its downsides:

 1. Personal risk

You would be lucky to have a debt-free business if you self-finance but you’re entirely on the hook if the venture doesn’t pan out. A March survey by KEPSA on 127 business showed that 62 per cent of micro-enterprises and 49 per cent of small-enterprises were the most-affected by Covid-19, and have had to close business, at least temporarily. That means thousands of people are out of business and most have no emergency fund to fall back to. As a precaution, always have enough left in your emergency fund regardless of how good you think your business will do. Also, consider not using your personal savings if you are already in deep personal debt.

2.  Missing out on mentorship

 Many angel investors and venture capitalists are entrepreneurs who have been in business for years and have a wealth of information and experience to help them wade the murky business world. Not only that, they may also offer contacts and connections that would otherwise be unavailable to you. You miss out on all this when you decide to start on your own.

 3. You might succeed

This may sound like a good problem to have. It could be, but only if you didn’t use up all your savings as capital. How can being successful be the worst thing to happen to a self-financed entrepreneur? You may put in for instance Sh1 million of your savings into making homemade jam then you get a call from a supermarket that wants you to stock up all its 20 branches. You now 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 your client what they want. As an entrepreneur, the rule is always ‘No cash, no business’.

Weighing the pros and cons, you may decide personal savings are the way to go. If you have the money, why not?  Now comes the question of whether you should you pour all your savings into your budding business. Here are a few considerations:

 Use a low-interest credit card and defer your expenditures

This is risky but worth a shot. Say your total business costs amount to Sh1 million.  If you can stagger the amount so you don’t need the full amount up front, you should be able to use a credit card effectively. You would need high level discipline in this case because an interest rate of about 13 per cent to 22 per cent seems quite fair to good credit scores. However, if you miss a payment, that rate can zoom as high as 29 per cent. For entrepreneurs, a credit card offers you the opportunity of improving your credit score making you eligible for more credit to make a wide array of investments.

 Lower your initial hiring costs

 When you’re pouring your own money into your business, you’ll want to keep costs as low as possible. This might mean wearing more hats than you expected, at least at first. Learn every aspect of the business from accounting, product development, web design to advertising. This way, you can hold off on hiring someone for these tasks for a while. When you require help, outsource to freelancers and independent contractors to save up on hiring permanent staff.

  Take on a side gig

 Sounds crazy to quit your job to start a business, then get another job. However, a side gig can give you the money you need for your new business venture. You could sign up with a freelance site or even list your house as an Airbnb while you are away. Better yet, don’t quit your job. While most side gigs and regular job aren’t going to fund your business immediately, the income you earn can add up quickly.


 You got your business up and running, and now you’re making profits after four months of grueling work. Don’t go and start building your retirement home with that money. Instead, plough it back into the business. That is called bootstrapping. Re-evaluate your salary and expenses to see if there is any wiggle room for taking profits from the business and allocating it towards something that you know is going to improve it in the long run.

 Take the example of Apple Inc. In 1976, Steve Jobs secured a purchase order for 100 computers from a local shop, but couldn’t afford to pay $20,000 for the parts he’d need to manufacture them. He managed to convince a supplier to sell him the parts on credit, however, using the customer’s $50,000 order as a guarantee that he would be able to pay the bill within a month. He and Steve Wozniak built the computers, sold them for $50,000, and were able to pay their $20,000 bill with the proceeds. Apple Computer was born. Find similar creative ways to stretch your resources.

SMEs KEPSA Apple Computer
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