Rachel (not her real name), retired from a successful corporate career, wanted to do something to help aspiring women entrepreneurs coming from disadvantaged backgrounds. She had planned, saved, and invested well and was certainly able to retire comfortably, but she wasn’t sure her personal assets were sufficient to launch and sustain the type of vision she had in mind.
Phillip (also an alias), second-generation steward of a significant family financial enterprise, sensed an opportunity existed for a profitable venture involving local real estate. While the family had the means to fund the project, Phillip wondered if leveraged financing made more sense.
A woman we’ll call Margaret had been out of the workforce for a number of years. Recently widowed, she was considering using a portion of the considerable assets left to her from her deceased husband to open a small boutique.
In each of these three fictional scenarios, persons with wealth are contemplating a personal project and considering the all-important question: What’s the best way to finance it? It isn’t unusual for affluent individuals to launch personal projects: for philanthropic purposes, to take advantage of a business opportunity, or simply out of personal interest. In some cases, personal wealth may be sufficient for the purpose, but is it always wise to employ it in these ways? This article takes a look at some pros and cons of various methods of financing personal projects.
A Little Help from My Friends: Funding from Others
Charitable and philanthropic organizations are often the result of persons with both financial means and a deep desire to benefit their communities or society in some meaningful way. But creating such an organization and providing it with the financial means to pursue its mission long-term can be a steep—and expensive—challenge. Certainly, many extremely wealthy persons (names like Gates, Rockefeller, and Zuckerberg come to mind) have created influential and effective philanthropic efforts, using entirely their own funds. But is it possible for someone with less astronomical means to launch a worthy charitable mission?
In such a situation, getting help from other interested persons or entities may be an answer. While it is typically important that the would-be founder have “skin in the game” in the form of contributed personal assets, it can be worthwhile to invite others to join the effort, potentially expanding both the pool of funds available and “ownership” on the part of like-minded persons and organizations. It may be possible to find grant funding by doing some research on sites like Grants.gov, GrantsForWomen.org, or private subscription platforms like Instrumentl.com (Note: some platforms require a fee or subscription for use).
The obvious downside of this approach, of course, is that once you accept funding from other sources, you must also potentially accept their input, conditions, and, in many cases with granting organizations, their periodic reporting requirements. But if your vision is larger than your personal means can handle, there are worse courses than inviting the participation of others with a similar mission.
The Joys and Challenges of Debt Financing
Sometimes an opportunity has the right potential, but tying it too closely to personal assets may seem inappropriate. The wise use of leverage, in the form of debt, may be the way to go. Persons with significant assets may even have access to sources of loaned capital that offer more favorable terms than those available through more traditional sources. Debt financing may even be less expensive than using personal equity, since interest payments may be tax-deductible as a business expense, and the periodic payments may offer predictability for project budgeting purposes. Particularly if the anticipated cash flow from the project can cover most or all of the payments on the debt, the eventual profit generated can amplify the borrower’s wealth without the need for using current assets to fund the project.
Of course, debt can be a two-edged sword. If the project fails to live up to its potential, the debt must still be serviced. In extreme cases, the borrower’s personal assets could be at risk. But if the scenario succeeds, the borrower will have created a profitable outcome without diluting ownership or diverting existing capital.
The Shop around the Corner: Starting a Small Business
There’s nothing wrong with channeling a lifelong passion into a business undertaking. Perhaps you’ve acquired a significant antique collection over years of effort and study, and you’ve decided to share your enjoyment and knowledge with the buying public. Or maybe your well-honed fashion eye is seeking a more visible outlet that includes customers.
Using personal wealth to set up shop, whether in a retail setting or in some other way, can be a worthwhile and satisfying way to achieve a sense of personal accomplishment. But it’s vital to count all the costs, going in. If you’re renting a space, what are rates like in the area where you are likely to find most of your customers? Will you require staff, or do you intend to manage as a one-person enterprise? If you do have employees, you’ll need to consider accounting efforts, such as payroll expense and taxes. And if your business requires inventory, will you pay for it with cash or use some sort of floor-plan financing?
These are just a few of the questions you’ll need to answer as you prepare to open the business. The ultimate consideration, of course, is: Will the expense involved in starting the business put a potentially dangerous dent in your assets? Remember, if you’re starting this business because you want to enjoy it, you don’t want to place your ongoing financial wellbeing at risk.
Whatever the nature of your personal project, whether philanthropic, for-profit, or just for enjoyment, your JFS wealth advisor can be a valuable guide. With a targeted approach to comprehensive financial planning, our familiarity with clients’ resources, aims, and life priorities allows us to work with them to consider a wide range of possibilities. Our wealth management services can help give shape to your dreams. Please get in touch with us.
