Use cash to start a business or for a down payment on a home.

September 1, 2009 6:40 PM

Use cash to start a business or for a down payment on a home.

I have been interested in having my own business. I have read business magazines for years and have even had a couple of small service-based businesses that I ran part time. No big bucks there but a rewarding experience.

Recently I've been considering trying to start a business for real. I have a small sum of cash (between 10-20k) I've been slowly saving for a home down payment.

It's a tough choice. Since I need a home to live in, buying one would mean an investment in my future and security. However, chances are that I won't get rich working for a private company. In fact, it's quite hard to get ahead nowadays with most of the good middle management positions gone. Meanwhile, most of the people I've known who did quite well for themselves did it by owning their own business.

I'm not saying it's easy. I'm just thinking that owning a business seems like my best shot at getting ahead, and it also happens to be a genuine interest of mine. At the same time, starting a business is a huge risk (I think it's something like 4 out of 5 fail within 5 years) and I could lose the money as well as a lot of time and energy.

I believe I have many of the qualities that would contribute to success in business. But it's hard for me to know if I have all of them.

What's your take? How have those of you who have been in a similar position weighed the pros and cons of such a decision.

posted by mintchip to work & money (10 comments total)

Your question is too vague to give much of an accurate answer, but a good starting point would be to consider whether you have the personality of an entrepreneur.

As for using $10 - $20 thousand as a downpayment for a house, I'm not sure where you live, but that sounds like you would be taking on a pretty significant mortgage with that little principal.

I'd choose neither and continue renting.

But then I'm neither an entrepreneur nor financially reckless. Which, in some respects, is often the same thing.
posted by dfriedman at 6:44 PM on September 1

I'd do some research: how much money do you need to actually run the business? Plus, how much would you need to live on for a year or two? For almost any business I suspect the total will be much more than $20K.
posted by zompist at 6:52 PM on September 1

Imagine yourself in two situations. In one, you're five years down the road. You have a moderately stressful successful small business with two cheerful employees, but you're paying high rent on a depressing apartment. In the other, you're five years down the road and you have a boring, punch-the-clock job and your coworkers are a little creepy, but you live in a nice house with a big kitchen and you are about to go hang some drywall to finish your basement. Adjust scenarios to taste.

Which of those scenarios would give you more regrets?

Also, in a lot of places $10-20k is a perfectly reasonable down payment on a 30 year fixed. Rates are as low as they're going to get, as far as I can tell (I'm just some non-realtor dude but we are buying a house right now), so look at the financial tradeoffs there too. If you can save up another $20k in two years but the prime rate goes up two points, what does that do to your payments? Depends on whether you want a $100k house or a $350k house. A realtor or lender will gladly help you out with this kind of forecasting for free, or this is a decent online loan calculator. Don't forget about closing costs etc.
posted by mindsound at 7:02 PM on September 1 [1 favorite has favorites]

Why not start a side business with a small amount of your capital in your spare time and see how it goes? That could provide you with a realistic outlook on the market you're targeting, useful contacts and references, and a feeling about how you'd fare putting in fulltime effort, which often amounts to no spare time for an extended period for entrepreneurs who become successful.
posted by notashroom at 7:03 PM on September 1

Yes, chances are that you won't get rich working for another company. Chances are also that you won't get rich starting a business, but they are better.
It depends on your personality. Are you a risk taker by nature? Do you think you would go a bit crazy just working for someone else? If you have the entrepreneurial spirit, you owe it to yourself to give it a try.
Being an entrepreneur isn't reckless unless you go off starting a business half cocked. You need to know what you're doing, know the business inside and out before you get into it. Actually working in the field for a period of time before risking your own money on it is probably the best advice, and it's probably one of the more important qualifications for a successful business. That, and the ability to persevere over the big bumps in the road when they come up.


Another thing to consider is the order you want to do these things. You're right in thinking that you could easily lose your money if a business you start goes bust. You can start saving money again if you lose it. If you buy the house, however, what are the odds that you will feel the same comfort level making a risky move like starting a business? I can pretty much guarantee that you will start thinking more conservatively once you have the responsibility of a mortgage hanging over you.
The same thing with waiting until later in life to start a business. It's been my experience, and I think it's true of most people, that as you get older you become more risk adverse.
It always made sense to me to get the income going first then buy the property. This is what has worked so far for me. I could never imagine myself in a "regular" job growing up, and feel pretty much like I didn't have a choice, I would be doing my own thing. It just seemed like the only option. After one very early success, then a decade of not quite so successful ventures, I finally hit my stride. Then, after I got a pretty reliable income from my businesses, I felt more comfortable buying a home and then a couple of other(vacation) properties as well.

If you feel as if you are driven to start a business at some point in your life, now is better than later, is all I'm saying.
posted by newpotato at 7:57 PM on September 1

Some public libraries offer a service where experienced business professionals and entrepreneurs offer free advice. It is usually on a regular schedule but reservations are required. This might be a good option for you since the answer to your question probably involves more info than you would probably be comfortable putting out on the interwebs.
posted by nestor_makhno at 9:03 PM on September 1

Prices and interest rates are low. Seems like a great time to buy a house.
Consumer anxiety and debt are high. Seems like a bad time to start a business.

If you have a business idea that you can start out of your home (rather than renting a shop or retail location) you'll need less start up money and still might be able to claim it as an expense on your taxes.
posted by bonobothegreat at 9:56 PM on September 1

As someone who was recently laid off and was stuck with the choice of hunting for a new job working for someone else, or risking it all and staying afloat on my savings while I try to start a new business, I feel I'm in a good position to lend some advice.

First off, you don't give nearly enough info for us to give any solid advice. It would be very helpful to know what your previous businesses were, what business you are now considering getting into, your relevant experience in that, etc.

People who start off with "oh, I want to go into business for myself since I have some spare cash" tend to not do as well as people who say "I have a lot of experience in this field, I think there's a gap in the current market offerings I could fill and I have the knowledge to put all the pieces together to get this off the ground, I think I could be profitable based on X,Y,Z numbers."

Now, from the limited info you provided, you may be the latter and just didn't share that but if not, you should seriously consider whether it is right for you. I would second someone else's reco which was start a smaller business on the side and try to grow that. If you have the luxury of a job, leverage that income to grow the side business in a non-risky way and if it doesn't go anywhere, you'll at least have money left over.

Also, I HIGHLY suggest going out and finding other people who do the type of business you are considering getting into and asking them about how they got started, startup challenges, etc. If you are only working locally, try asking people in other geographic areas...they won't view you as competition and are usually much more willing to share details.

It takes a certain type of risk-taking personality to start a business and make it successful. When I got laid off my first thought was "Awesome, I have the time/energy to make a real go at this now and I have all the details already planned out. I'll just job hunt to fulfill unemployment requirements so I can stretch my funds even further."

You should sit down and seriously ask yourself...what is your first thought on the matter? Go with your gut.
posted by Elminster24 at 10:24 PM on September 1

While I agree with Elminster24 in that you're hardly providing enough information to receive solid, rational advise, I'd like to mention that entrepreneurs can hardly be considered rational.

When I took my MBA what I liked most were the case studies; typically we'd receive a summary, either long or short, of the company, its history and its problems, and be asked our opinion on how to resolve these issues.

Since some of the case studies focused on either on start-ups or early stage companies, entrepreneurs featured highly. Speaking personally as someone who is highly risk averse, it was amazing how irrationally focused some of them acted in pursuit of their goal.

Spending a possible down payment on a home to start your own business? Pretty tame; I've read of folks who have not only mortgaged their home but their parents home (paid for!) as well, maxed out credit cards, bounced cheques, put the wife out in to work, on and on, just to start a company.

You're the only person that will know if you've got the drive to just do it; we can't really answer that question which really seems to be your question.

You didn't provide any age information and I'm not gong to mine your profile trying to find out, but frequently the most successful entrepreneurs tried and failed time and time again before succeeding.

Studying these stories, for me the significant thing wasn't that they tried and failed, no what really jumped out at me was that some of them try and try and try again before succeeding. And with every failure they learn something, up their game, refine their chances of success. It is an invaluable education, something you won't learn in business school.

Start a business or buy a home? You're the only person who can answer that question.
posted by Mutant at 12:06 AM on September 2

For me, starting my own business was self-actualization at its finest. I always knew it's what I was meant to do. That said, there was a moment in my life when the planets aligned (enough freedom and security were temporarily in place) and I knew if I didn't quit my job and make the leap NOW, I would never do it.

I'm as big a fan of starting your own business as you'll find, but also a huge proponent of bootstrapping it. A lot of service businesses can be started for a relatively small financial investment and a lot of guts – if that's the case I'd go for it.
posted by BirdD0g at 7:38 AM on September 2