Key takeaways

  • By investing your personal funds into a business, you are putting those funds at risk.
  • Steps you can take to limit your personal liability against business losses include setting up a business bank account and forming the right type of entity.
  • A business credit card can help fund your growing operation, while also offering rewards tailored for small business owners.

If you’re moving forward with a business plan, you may be considering your personal funds as a potential source of financing. While the ease of access to your personal funds can make this sound like a tempting way to invest in your fledgling business, there are pros and cons to doing so.

In all cases, it’s best to start off by setting up a business bank account for your new enterprise.

Open a bank account for your business

By setting up a business account, you’ll be able to keep your personal funds separate from money that you use in the business. This will also help you better track your business spending and expenses.

Maintaining separate accounts for your business also helps when it comes time to file the inevitable tax returns. Further, in the case of any business debts or losses, keeping your business and personal funds separate may help minimize your personal liability for such financial fallouts.

Choose between different sources of personal funds

Once your business bank account is open and your initial registration is taken care of, consider which sources of personal funding you’ll tap into for your business enterprise, if any. One may be your personal savings, which is often the easiest to access. You may also be able to turn to your personal credit card for a cash advance if you have the credit available, though these often come with steep interest rates.

Other potential sources of funding include tapping into your retirement savings or even your home equity, if these sources are available to you. Be very cautious about tapping into these funding sources, however, since doing so could jeopardize your retirement or your home if a business loss occurs.

Finally, you could consider taking out a personal loan or asking friends and family to act as investors in your new business. Just be sure to clearly establish terms for paying back funds or taking ownership stakes in your company before doing so to prevent relationships from souring over disagreements later on.

Structure your personal contributions as a business loan

By setting up your business as an LLC or other business entity, you can take out a business loan for it. Begin by drawing up paperwork that specifies the terms of the loan, such as how frequently it will be repaid and how much interest you’ll be charged.

Be aware, however, that while your business can deduct interest payments on the loan as a business expense, you will need to pay taxes on a personal tax return for any interest payments you receive on the loan from the business. A qualified tax planner or CPA can help ensure you structure the loan in a way that benefits both you and your business.

Risks of using your personal funds

When starting up your business, understand the risks of investing your personal funds into your new company.

  • Businesses can be structured in various ways with the intent of separating your personal liability from your business liability. When you set up your business as a limited liability company — or an LLC — your debtors can’t turn to your personal assets to satisfy your business obligations. However, when you commingle your personal money with your business money, you lose that protection.

    Not only that, but keep in mind that business startups have a high rate of failure. Data from the Bureau of Labor Statistics indicates that roughly half of business startups don’t survive past the five-year mark.
  • Unless you have especially deep pockets, there’s a good chance you won’t have access to enough money to fully fund your new operation. New entrepreneurs are often caught off guard with the number of unexpected expenses involved in running a business, and it may take some time before you’re profitable enough to take income from the business to recoup your personal funds.

    As a result, you may find yourself in the position of having exhausted your personal funds, but still needing to seek additional financing sources to keep your business running.
  • A tremendous advantage of using small-business credit cards is that they come with rewards programs designed specifically for the needs of small-business owners, as well as help with building up your business credit.

    One such perk is a 0 percent introductory period. If you were to get a credit card that comes with 0% APR for 12 months, you’d have a year to use the card issuer’s money to buy materials, packaging items and shipping supplies without any financing fees added to your debt — that is, as long as you can make your payments on time and pay off your balance before the promotional rate ends.

    A small business credit card could also help you earn rewards such as cash, points or miles with every purchase, not to mention earn you a large welcome bonus when you open the card and spend a minimum amount in the first few months. Many small business cards come with excellent accounting features, too, which can help you track your costs and more easily prepare your taxes.

Consider a secured business credit card

If you currently have a poor or fair credit rating, it may be a good idea to build up your creditworthiness before starting your business. This way, you’ll be able to earn more favorable terms on any business debt you eventually need to take on.

You can request your credit reports weekly from U.S. credit reporting agencies Equifax, Experian and TransUnion through the free site, and major credit card issuers like American Express and Capital One offer the cardholders to see their credit score online or through an app. (You can get access to your FICO score from for a fee.) Both resources can help you understand where you currently stand financially, and how much you’ll need to do to repair your credit.

Another option for new businesses is a secured business credit card. These cares require you to put down a deposit that serves as security for your card’s line of credit. You can then build up your credit and graduate to a stronger unsecured card as your business and credit scores grow.

The bottom line

There’s something to be said for investing your own hard-earned money into your business, but the last thing you want is to lose money that you’ve worked hard to earn and made sacrifices to save. Taking time to understand the challenges and risks that could come from investing your personal money into your business will help guide you toward the best choices for your ambitions, budget and financial goals.

Understand the steps you can take to limit your personal liability against business losses, including business accounts and business credit cards. The best business credit cards can keep your personal money separate from your business, with perks like rewards programs, expense tracking and employee cards to support your business as it grows.