5 Personal Finance Tips for Cash-Strapped Entrepreneurs How to go all-in on a new business venture without draining your personal bank account.

By Adam Wren

Opinions expressed by Entrepreneur contributors are their own.


Going all-in is sometimes the only way to go. But as an entrepreneur, when the majority of your net worth and compensation are wrapped up in the success of your business, your personal finances can suffer.

At 26, Brian Fox, founder and chief marketing officer of Confirmation.com, a Brentwood, Tenn.-based online auditing company, found himself in that position. In 2001, Fox was a newly minted MBA from Vanderbilt University, the proud owner of a struggling startup -- and the not-so-proud owner of $92,000 in student loan debt. At one point, Fox recalls taking his Honda Accord to a CarMax for an estimate just in case he needed to sell it to pay his employees' health insurance costs. Luckily, a $25,000 nick-of-time check from an investor spared the car.

"I was paying everybody with equity," Fox says. "Everything went on my personal credit card at the time. I deferred my student loans. My wife and I were borrowing money from family to live on, and we moved the business into my grandparents' garage."

More than a decade later, that once-faltering startup is serving 10,000 accounting firms across the globe and reaping annual revenues of $12 million. Here are five personal finance lessons for cash-strapped entrepreneurs in the startup phase.

1. Have a cash cushion.
At the start, Fox's personal rainy day fund consisted of only $20,000 in stock certificates from the bank where his grandfather worked, but more robust reserves would have helped, he says.

Jason Papier, a stock options expert in Silicon Valley and president of financial management firm Fluent Wealth Partners, recommends that entrepreneurs have one year's worth of personal expenses set aside in a liquid account for an emergency.

Related: How to Change the Financial Future of Your Business

2. Cut your cost of living.
Fox started his business while he and his wife were raising two children. Without a large cash cushion, he focused on trimming expenses. "We were taking stay-cations before they were cool," he says. They also cut cable television, switched to a low-cost cell phone plan and stopped eating out.

Even if a business owner has personal savings, it's still wise to pare back costs, Papier says. "You have to be able to say, 'I'm going to live on ramen and rice for the next three years.' "

3. Get a little help from your friends and family.
For the first three years, Confirmation ran on loans from roughly 20 of Fox's family members in exchange for equity in the company. "To whatever extent you can, leverage family and friends to help you, if need be, especially if you believe in what you're doing," he says.

What's more, beware of handshake deals. "My advice is to keep [a loan] simple, but make sure it's all documented," Fox says. Otherwise, a murky capital structure can discourage potential investors from getting involved in future funding rounds.

Dan Sudit, a financial advisor with BMO Harris Private Bank in Seattle, says it's also a matter of maintaining relationships with your friends and family. "If early on you've got a family member that is contributing to your lifestyle while you're engaged in this venture, there should be a clear understanding as to what their expectations should be," Sudit says. He advises clarifying the following questions: Will they recoup their total investment, and when? Will they get their money back with interest? Are they under the impression that the business presents tremendous opportunity, and they'll get some of the upside?

Related: 12 Creative Money-Saving Tactics for Small-Business Owners

4. Don't give away too many shares too early.
As Fox apportioned equity in his company, he wanted to maximize his investment. He didn't give away large chunks of equity to employees, family or friends, which would have decreased his ownership percentage.

Many entrepreneurs make the mistake of giving away too many options too soon, which financial professionals refer to as "over-diluting" your shares. "If your primary goal is to make as much money as possible, then you are going to want to have a concentrated position," says Papier.

In any funding round, a rule of thumb is to offer investors no more than 20 to 40 percent of the ownership, Fox says. The fewer equity-holders, the greater potential financial windfall for the founding entrepreneur.

5. Consider pausing retirement saving.
Fox didn't have the luxury to save for retirement during the startup phase, a move that Indianapolis, Ind.-based personal finance advisor Peter Dunn says can be a wise gamble. He estimates that 95 percent of the entrepreneurs he's worked with have taken that approach.

"During this lean period, it's OK to personally run in place financially," Dunn says. "It's the people who go backwards who end up ruining their personal financial lives because of their business lives -- who take on a lot of credit card debt or giant home equity lines to fund the business. That's where things start to really go down quick."

Related: A Quick Guide to Crafting a Budget Plan

Wavy Line

Adam Wren is a freelance writer in Indianapolis, Ind., where he is a contributing editor at Indianapolis Monthly magazine. He covers topics ranging from entrepreneurship to education, and worked as a researcher on the book Finding the Next Steve Jobs by Atari founder Nolan Bushnell and Gene Stone. He earned his master's in journalism at Northwestern University's Medill School. Visit his website: adamwren.net. Follow him on Twitter: @adamwren.

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