It makes sense to pay for expenses out of your own pocket when you’re first starting out in business.However, if you wish to speed your growth or require additional funds for other reasons, you’ll need to decide where you’ll look for funding.
Some entrepreneurs seek small company loans, while others seek venture capital in the form of angel investors.
Others prefer to rely on their own resources.
These people aren’t always millionaires, company founders with a track record of selling companies, or people with a lot of money.Sure, in order to self-finance your business, you’ll need a certain level of financial security.However, if you think you can pull it off, there are several compelling reasons to consider it.
We’ll look at why small business owners might prefer to support their ventures with their own money rather than relying on outside sources.
Plus, if you choose that path, we’ll give you some pointers on how to keep your firm afloat.
Self-Financing is defined as using your own money to fund your company.
We don’t only mean paying off your own company credit card bills while buying goods for your Etsy shop when we talk about self-financing.Because, while that is technically self-financing, this is a larger discussion.Many people refer to this as “bootstrapping” your firm.
What Does It Mean to “Bootstrap” Your Business?
You’ve heard the expression “lift yourself up by your bootstraps”?
You can see where this is going.To “bootstrap” a firm, it involves beginning and running it entirely with your own money, with no aid from outside sources.
Because you’re investing your own money into your firm, self-financing—or bootstrapping—usually it’s done on a tight budget.Many small business entrepreneurs and startup founders talk about bootstrapping their businesses when discussing how they got started.
And the vast majority weren’t independently wealthy, nor did they have a track record of multimillion-dollar exits from previous ventures.
The final conclusion is that many entrepreneurs are capable of self-financing their businesses.And just because you do doesn’t rule out the possibility of eventually raising venture capital or outside finance.Many investors prefer to see that you’ve grown your company on a tight budget.The Small Business Administration even wants proof of equity in your business when applying for SBA loans—both in the form of sweat and in the form of capital.
The Benefits and Drawbacks of Starting a Business from Scratch
At some time, the vast majority of small firms self-finance:
Small enterprises rely on their own funds in excess of two-thirds of the time.
There are a variety of reasons why you could want to pursue additional sources of capital—and why you might not.
Consider both sides of the self-financing coin when weighing your options for company financing:
As an entrepreneur, the Advantages of Self-Financing
Keep your equity and ownership.
Investing your own money in your small business rather than taking on investors ensures that you retain ownership of every slice of the pie.(As well as your profits.)And for many business owners, whose livelihoods are entwined with their businesses, this is critical.You may not be prepared to not only give away a significant chunk of your company, but also to continue to dilute your ownership as investors press you to raise further funds.
Keep your cool.Similarly, you might give up entire control of your company by offering shares in exchange for investment.This could happen as a result of investor pressure to modify your company’s direction, or as you relinquish board seats or voting rights.
The emphasis is on money.This may seem a little far-fetched, but it’s a lot easier to spend money that isn’t yours.Knowing that every business move you make has a direct impact on your personal finances can lead to increased cost-cutting and financial discipline.
There was no one to report to.You don’t have to pay interest to a loan or show a balance sheet to investors if you’re bootstrapping.It’s good not to have to worry about missing loan payments or losing your backers’ trust during a bad month.
Using Your Own Money for Financing Has Its Drawbacks
There aren’t enough advisors or contacts.If you want to obtain funds through a loan or investment from friends and family, or seek out angel investors, you’ll be tapping into their networks as well.And, in business, having a fresh viewpoint is always beneficial—working with your head down can lead to missed chances or issues.You might be shocked to learn that small business loans come with networks; for example, the Small Business Administration’s SBA loan program includes outstanding advice tools for entrepreneurs.Even developing a relationship with a lender can be beneficial in the future for higher rates.
Slower expansion due to a less budget.
A lot of things in business are expensive.
Equipment that is newer and more efficient.
Raw resources of higher quality.
Skilled labor is required.
Even if you have the funds to pay for these items, you may find yourself in a situation where you want to take advantage of a large new client or grow into a new market but lack the funds to fund inventory.Growth is costly, and you may not be able to pay it only through bootstrapping.
You’re putting your own money on the line.Even if you already have separate business and personal money (right? ), the idea of self-funding your firm is personally dangerous.After all, you’re investing your own money, and if things don’t go as planned, you’re taking a risk.
In self-financing, it’s important to understand personal risk.
Before we continue, let’s revisit the idea from the last part concerning your distinct accounts.
In the early stages of a firm, it’s easy to overlook opening a business bank account or forming a legal corporation.Especially if you didn’t start your business with a capital S—perhaps it was a freelance assignment that grew into something bigger or a pastime that started to pay off and you took it full time.
Every business owner, whether self-funded or not, requires a business and personal bank account.It’s critical to keep your personal and business relationships distinct when it comes to tax season.However, if you get into difficulties with your employer, it could have legal ramifications.You could jeopardize all of your personal assets if there is no clear distinction between personal and business.
Who Should Think About Self-Financing Their Startup?
Self-financing isn’t for everyone, just as taking out a small business loan or venture capital isn’t for everyone.However, there are some situations in which it is preferable to finance with your own funds.
If you want to start a business from the ground up, consider bootstrapping it.
You’re already in some sort of debt.Whether you have a mortgage or a student loan, you may want to consider extending your runway as much as possible to avoid accumulating further debt (or give away equity, either).
To be successful, your product or service does not require rapid market penetration.
Consider growing at your own pace with your own money if you’re not working on a fast-developing technology that you need to get to market quickly.
This is especially true for consumer items that do not require rapid traction to grow.
You don’t need any money up front to develop your idea.Some businesses require a significant sum of money to prototype or market test their products.If that isn’t your business and you can demonstrate that you have a viable product without a capital infusion, that will help you later.
You’re well aware of your ability to operate efficiently.Don’t just employ for the sake of hiring!If you can get things done on a shoestring budget, go ahead and do so.You don’t have to complete everything at once; often, just creating a minimal viable product (MVP) is enough to propel you forward.
You’re an expert in your field.If you have a lot of experience in your industry and can use your background to build connections, then use your network rather than giving up a piece of your pie to use someone else’s.
You have enough money to spend without draining your savings.Although we’ve already stated that you don’t need to be independently rich to bootstrap, you will need some sort of financial buffer in addition to the money you’re investing in your business.Because you can’t end up without a roof over your head if things don’t work out.
You’re a risk taker.
Many tiny firms are doomed to fail.
We’re not trying to be pessimistic; instead, we’re providing you a reality check.
Self-financing may not be for you if the thought of it makes you jump.
Using your own money to start a business is dangerous, and you must be willing to accept the possibility of losing a lot of money.
(However, you might succeed as well—just saying!)
Sources of Personal Capital to Investigate
If you’re self-funding your company, staying in the black isn’t always possible.
Bootstrapping Success Strategies that Work
If you decide to self-fund your business, you’ll need to commit to certain specific capital management practices in order to keep your expenditures under control and your accounting in order.That way, your money will stretch further, hopefully giving you more room to flourish.
- Keep a close eye on your expenses.
This is one of those things that nearly goes without saying… almost.
Cost management isn’t a one-time event; it’s a continuous assessment of your profit and loss statement.There are dynamic elements, such as keeping an eye on industry trends to see if the price of your raw materials is likely to rise, affecting your cost of products sold (COGS).
However, there are other ways to cut costs, such as not renting office space until you need it.
On a regular basis, audit your fixed and variable costs.If you’re finding yourself spending more than you should, consider getting a prepaid business debit card that you can pre-load with your monthly budget so you can’t go over it.
- Keep track of your cash flow.
The single most telling indicator of your company’s financial health is cash flow.
What is your current financial situation, where is your money going, and what are you spending it on?
Create and evaluate your cash flow statement using your accounting software for small businesses.But don’t forget to make monthly cash flow projections and even a cash budget so you have all you need.Three documents are better than one since they all have an impact on each other and will assist you control those short-term costs and margins.
- Check to see if your eyes are larger than your stomach.
To put it another way, be reasonable.
Although you should always strive for large things, it’s useful to remember that bootstrapping your organization implies you’ll expand slower than a competitor with a $3 million financial injection.When chances present themselves, be extremely critical in your assessment, and if you have a trustworthy outsider to turn to, don’t be hesitant to ask for an objective opinion.
Remember, bigger isn’t always better—as long as you’re making purposeful, correct movements, you’ll discover right-sized success as well.
Additional Considerations for Self-Financing Business Owners
There’s no getting past the fact that completely self-funding your business venture carries a higher level of risk.If something doesn’t go as planned, you don’t want to be in a position where you’ve spent all of your savings or lost all you’ve worked so hard for in retirement.
On the other hand, nothing compares to achieving success and owning every penny of your earnings.
Make sure you have a thorough understanding of your money before deciding which path to choose.It’s great if you work with an accountant to fully comprehend the amount of money you should have in the bank and in reserves.Also, keep in mind that you can look into small company loans to see what other possibilities you have.The best decision is the one that is made with the greatest information.