Although most people hear “small business owner” and think of somebody who does that full time, many fully employed people run a small business on the side. So do retirees, stay-at-home parents and other people who don’t have another paying job, but only work on the business part time.
It’s an easy mistake to think those side businesses don’t count as a “real business” and will never need outside funding…but it’s still a mistake.
We get it. Why would you invest in a business that’s just a sideline? You invest for the same reasons you invest in yourself to get your regular job: to help you move from the situation you’re in to the situation you want to be in. With your side business, the same reasons apply.
Surviving a Rough Patch — businesses of all kinds hit slow periods that threaten their ability to stay open. Side businesses can often weather these patches more easily since you don’t rely on it for living expenses. Still, well-timed funding can make the rough patch go more smoothly and set you up to capitalize on better times when they arrive.
Maximizing Profits — every business encounters opportunities to improve their profits. Some examples include marketing media, large sales that reduce the cost of goods sold, and equipment to improve the efficiency of the operation. In many cases, the regular cash flow of a side business never amounts to enough extra to take advantage of these opportunities. A one-time cash influx, though, might.
Filling Orders — full time businesses often have deep pockets, access to strong credit, or a cash flow cycle that’s reliable. A side business benefits from fewer — if any — of these. This can put you in a position where you have orders to fill, but no funds to buy the parts or goods to make the order. Funding even one time can tip the cash flow scales so you’re always stocked to fill orders.
Firing Your Boss — this is the secret dream of many (maybe most) folks who run a side business. They’re looking for the day that business generates enough cash to become their full-time job. Truth is, that rarely occurs when you’re viewing the business as a side business. Some funding and extra effort can give it the legs and scale to shift your thinking and make this secret dream and open reality.
Sometimes you can provide the needed funding out of your own coffers (an option often more available to employed people with side businesses than to full-time entrepreneurs). Sometimes you need to find the money elsewhere (see below for more about that).
The risks associated with funding a side business are the same as those with funding a larger operation: what if the funding doesn’t lead to success. This means you’ve put extra money into a side business that wasn’t generating enough money in the first place. With full-time, brick-and-mortar businesses, this kind of thing closes doors.
With a side business, you’re likely to be able to stay open…but the lost revenue defeats the purpose of all that extra work. The key is to fund for the right reasons, at the right time, and with the focused attention one would put into a full-time operation.
If you decide to fund your side business, the next decision is how to get the funding. There are a few common routes to get the money.
- Self-Funding — paying for the funding out of your own pocket. This is the most common way for people to fund small businesses. Pros: simplest method, no interest payments. Cons: limited resources, puts all risks on you.
- Investors— you can invite in friends or family members to buy a portion of the business and share in the profit. They provide the funding, and hopefully the extra profits mean your share of the pie is larger than the whole pie before the investing. Pros: no interest payments, easier than some bank loans. Cons: giving up part of the ownership.
- Credit Cards — if all else fails, you can use a business or personal credit card to make ends meet. This can take the form of buying things direct with the card, or of using the card for other expenses while you go through personal or business cash reserves. Pros: simplicity, speed of access to funds, potential access to points or miles rewards. Cons: high interest rates, difficult to get business credit cards
- Business Line of Credit — though large banks will rarely touch a side business with a worthwhile loan, online lenders are often eager to extend an installment loan or line of credit to a small operation that shows potential. Pros: easy application, rapid funding. Cons: medium interest rates.
All businesses reach a point where you need to invest, die, or find some kind of stasis. There’s no universal answer about what you should do with yours, but if you decide to invest a revolving line of credit can be one of the best ways to grow a side business without dipping into funds from your regular job.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.