Should Personal Funds Be Used for Your Small Business Expansion?

Using some of your own funds to finance your new small business makes a good impression on lenders by showing the extent of your commitment. However, when your business becomes more established, you should consider all your options before deciding to use personal funds in your business.  In particular, the Small Business Administration (SBA) 504 loan has helped thousands of businesses finance real-estate expansion, with low down-payments and fixed interest rates.

What Kind Of Personal Funds Are We Talking About?

You may not even think you are using personal funds to finance your business, but “personal funds” can mean many things. There are different ways of accessing personal funds to use in your business, and you should be aware of all of them:

Using funds that you already have. This includes your cash savings, retirement savings or equity in your home to fund your business. While you don’t have to worry about restrictions or qualifications when accessing these funds, the downside is that you risk losing money or not having it at a time when you need it for something else.

Using personal credit. This means using your personal credit cards for business purposes, or you taking out a personal loan to fund your business. Here too, you have complete freedom to use the money or merchandise as you please. But your risk is magnified, since you are not only using resources that you may not be able to replace or access later, you are also taking a chance with your personal credit rating. If things go badly for your business, you will not only lose your personal funds, you may lose your personal credit potential, making the situation even harder to remedy.

Using funds from friends and family. You may gain access to all the funding you require, and perhaps a wealth of experience and knowledge to go along with it but you do have to consider the risk here. Not only are you risking your own financial well-being, you are risking the finances of those close to you and you are risking your personal relationships. They could be much harder to put right again than any financial setback.

While the kinds of personal funds may differ, all share some drawbacks:

  1. They are complex. Whether it comes from you or someone else, money can be injected into a business as equity (share purchase) or debt (a loan). Since the decision has ramifications (especially around tax time), you will need professional guidance. This is especially true when you include friends and family in your business operations. A highly detailed agreement is the best way to avoid conflict and ensure success.
  2. You credit is on the line in any case. Even though you aren’t securing a loan from a financial institution, your creditworthiness is impacted. If you need more financing in the future, for this business or for anything else, a lender is going to take a close look at your financial record and the debt you have incurred through personal funding.
  3. All of your personal resources combined may prove to be too little. Chances are, your personal funds are not going to equal the amount of money you could be getting from a conventional loan, such as the SBA 504 loan. This will mean cut corners, second-tier equipment or merchandise, and a dream that doesn’t come to full fruition.

One way to gain a helpful perspective on your financing options is to prequalify for commercial loans.

Prequalification will ensure that you are eligible, tell you how much financing you can qualify for, and what the monthly payment expectations are.  Using a Certified Development Company (CDC) such as TMC Financing, you can get prequalified for a 504 loan in 48 hours or less, with only a handful of documents:

  • three years of personal and business tax returns
  • a personal financial statement
  • interim financials

The fast turnaround time for prequalification is not the only reason a 504 loan is sought after by business owners around the U.S. The flexibility of the loan means that it can be used to finance many things that you might otherwise spend personal funds on, such as:

The 504 loan is administered by a CDC and loans are granted in conjunction with a conventional lender that provides 50% of the total. Your CDC facilitates the SBA loan for up to 40%, or $5 million ($5.5 million for manufacturing projects or if the project includes energy-efficiency measures), at a fixed, below-market rate. You provide 10% of the project cost as a down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment. These include businesses such as hotels, gas stations, medical facilities and vineyards and wineries.

The 504 loan has a 10-, 20-, or 25-year term. It is fully amortized (so there are no balloon payments).

You don’t have to finance your business alone, and you certainly don’t need to rely on your own money to do it. The 504 loan is designed to help your small business grow by providing accessible financing with flexible and cost-effective options. So before you dip into that savings account or send that business plan to your brother-in-law, contact one of TMC Financing’s 504 loan experts!

TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.


Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison