You may be asking yourself: “how much is enough?” However, this is probably the wrong question. It’s too open-ended; ‘enough’ is such a subjective term. So we ask our clients a different question altogether: “have you invested as much as you can?”
In most cases when raising capital, it’s good business sense to borrow as little as possible (although there are always exceptions). If you can self-fund your business venture, future profit will be yours to enjoy. As soon as you involve investors, the game changes.
Equity investors typically don’t want to have a larger stake in your business than you do (they don’t want to shoulder most of the risk), and banks aren’t in the business of becoming shareholders or owners.
Don’t fall into the trap of thinking it’s easier to borrow other people’s money than it is to invest your own. If you have more debt than equity, then the reality of the situation is that you no longer own your business. At the very minimum you must have more than 50 percent equity.
Most businesses can’t grow without some external funding
That said, we understand that most businesses can’t grow without at least some external funding. The key is not to get carried away and borrow money if you can afford to invest the borrowed amount yourself. In other words, invest as much as you feasibly can (without putting your financial security at risk) and raise capital to make up the shortfall (if needed). This is important for three reasons:
- It demonstrates that you are prepared to back yourself, which potential investors will appreciate.
- Too much debt can be the start of a vicious cycle, where all cash has to be used to paying debt and interest. Investors only want to invest in growth - not in a business where cash is either used to pay debt or dividends.
- The more 'skin you have in the game', the less profit you’ll have to share at a later date.
What are your chances of making this money back?
However, that’s not to say you should throw caution to the wind when investing in your own business and completely drain your personal savings. With more skin in the game comes a higher risk of getting burned. You must look at your company from a business perspective and ask yourself: “what are my chances of making this money back?”
It’s easy to become emotionally involved in your business idea and to keep throwing money at it even if it’s not generating the financial results you need. One way to avoid this happening is to seek external guidance. Ask for feedback from an experienced business mentor, a potential investor, an accountant, or anyone you can trust to form an unbiased opinion.
Many people don’t think to seek expert advice before putting their own money into their business. They probably view it as a simple transfer – after all, it’s all their money, just spread across different pots, right? Unfortunately, it’s not so straightforward. Investing in a business requires careful planning, regardless of whether it’s yours or someone else’s.
Read more: How much can you draw out of your business?
It’s good practice to start treating your business as separate from your personal affairs, right from the beginning. Not only is this important for tax purposes, it will also help you maintain an objective viewpoint and make sound decisions from a business perspective, not an emotional one. Often this is easier said than done, which is why you should consider speaking to your accountant or financial advisor before you decide to invest or raise capital.
Raising capital is not easy - it also comes with risk, so you absolutely can’t afford to get it wrong. Download our free guide to make your journey that little bit easier.
