Q: Should I mortgage my home to raise capital for my business?
A: Is your business any good? This is a really hard question to answer for any business owner, because they are too close to the action to be objective. But to know whether you should take on a significant personal debt to fund your business, it's a question you want the answer to.
The top three funding streams for start-up businesses around the world are personal savings, cash-flow, and credit cards. The reality is that you have to use your own gold before external streams such as angel investors will look to fund your business. It means a lot to anyone looking to invest their money, time or energy in your business that you have your own skin in the game.
The flip side to this is where you have sunk your entire family savings and financial wherewithal into your business, without an objective view on how it might come back. There are no guarantees on payback but not getting some sensible heads on it before you hang yourself out there is not ideal.
Business founders do use personal capital, including raising debt against their homes, to fund their businesses but be conscious of the behaviours this can drive. Having the roof over your family's head under threat when running a business proposition can be extremely stressful and take your mind off the job, further compounding the issue.
To feel good about taking this step I would suggest getting someone independent to value the business, and the potential for growth should you mortgage to invest in the business.
If you are going to mortgage things, have some very frank discussions with your family or whoever else is reliant on having a place to live with you.
Nick Churchouse is venture manager at Creative HQ, Wellington's start-up hub, www.creativehq.co.nz
A: Most NZ businesses use self finance (personal mortgages) to finance growth in their business. It is the quickest way to access funds for businesses particular early stage businesses and it will be the lowest interest rate you can get for debt finance.
The more important question to ask your self is, "is your business a wise investment of not only your money, but also your time and passion?" Before mortgaging your house develop a business/investment case to justify the investment vs the risk and payback. For example what market research have you conducted to validate the demand for your product/service? Too many business owners get deluded over their own visions and do not get them challenged. If you have a valid investment case test it by getting a third party to challenge your thinking.
Mark Robotham is a small business adviser, www.growthmanagement.co.nz
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