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Once a week, we post a question on the site that's come from one of our  readers. This week, it's from an aspiring entrepreneur trying to strike the right balance in terms of putting money into (and taking money out of) her potential new business:
Question:
Hey Gareth :)
I've been doing some serious brainstorming and I think I'm ready to start a small sustainable and expandable business but I'm taking in all the guidelines and advice I can get. So I hope you don't mind my asking for some of that advice from you...now and again? Basic things like key questions on how much of my personal savings should I put into a business (is that ave. 40% enough or too much) and how much should I be looking to get out of possible funders and/or investors? Is a bank loan as scary as it sounds? What percentage of the projected income should I consider as a personal share? I don't know, I have quite a few questions...
T
Answer:
Hi T,
You're more than welcome to fire away when you've got questions... For comprehensive guidance or ongoing answers, I'd lean towards taking an advisory role (at a nominal fee), but for the odd question, feel free to ask away... Let me start with those above for now:
1. How much of your savings to put in depends on what level of comfort/security you need/require personally. If you have other buffers (like live at home, a solid income, etc) you can afford to put in a higher proportion of savings. If those are the only savings you have, and you're unsure about the business, I'd be a bit more prudent about coughing up too much. There are stories about people who sell everything they have to pump money into their businesses (and some of them make a huge success of it), but I don't necessarily recommend going full tilt straight away. Test the waters at first, and then jump in when you know what the water's like...
2. Investors are always going to feel more comfortable about stumping up money for you, if you can show that you are committed to it yourself (as in, by putting in your own money). It's known as having 'skin in the game'. A rough guideline is to match how much you borrow with how much you've put in yourself. And make sure that, whatever happens, you're able to service the debt on what you borrowed (even if you have to deliver pizza to cover it)...
3. To expand on the bank loan vs. private investor thing, read our previous Reader Question Of The Week here...
4. How much of profit you take out should be dictated by two things - (a) how much of the work you're doing, and (b) how much you want to grow the business. (a) If you're one of a few partners, then a split needs to be agreed on, whereas if it's just you, you can take the lion's share. (b) If you want to grow the business (as compared to having a sideline just ticking along), you'll often find yourself ploughing profit back into the business, instead of taking all the cream for yourself (to invest in more marketing, or more product lines, for example). Also be sure not to put the business under too much financial pressure just because you want to splurge out yourself. Make sure that there's enough to cover the business's expenses (including a buffer in case it goes through a rough patch) before you start taking out too much for yourself...
Cheers,
Gareth
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