What to Know About Self-Funding Your Business
If you have a great business idea, one of the big hurdles to
actually putting that plan into action might be the funding.
Sometimes an opportunity presents itself. For example, you
might receive a cash
windfall from an insurance settlement or an inheritance. If so, you might
know right away you're going to use that money to start your business, and that
can be a good use for those funds.
If you don't find yourself in that situation, there are
still ways to self-fund a business. A lot of professionals think if you can do
it, self-funding is the best option for entrepreneurs.
With that in mind, the following are things to know.
Know the Pros and Cons
Self-funding a business is also known as bootstrapping, and
there are upsides to doing things this way, but also downsides to be aware of.
The pros of self-funding include:
- You know how much money you have available, so you can focus on putting it to the best possible use rather than chasing money from investors or lending institutions.
- When you self-finance, you retain control over your business, and you don't have to constantly worry about a bank or an investor suddenly withdrawing their support.
- You keep full ownership of your business, so when you become profitable, you, in turn, keep all of those profits.
- Bootstrapping can actually help you focus on following a budget and living within your means so that you can put your extra money into your business rather than wasting it or spending more than you should.
Of course, there are downsides to think about too:
- It can be stressful, and it can put a strain on other areas of your life when you're funding your business.
- You have to make sure you can adequately fund the business and still keep up with your day-to-day expenses.
- Depending on how you structure your business, if it fails, you could lose your personal assets.
The core idea of bootstrapping that can give it value is
that it teaches you about sacrifice and how to run a lean, agile business. If
you're using someone else's money, even if you have to pay it back, you might
not build as strong a foundation for your business as if you have to account to
yourself for every penny that you spend.
Is It Right For You?
Self-funding, while it does have advantages, isn't right for
every entrepreneur. If you have huge startup costs, for example, it's probably
not going to work. If you already have big financial liabilities or debt in
your personal life, it might also be better for you to find
other ways to fund your business.
What's Considered Self-Funding?
You don't always have to have the cash set aside to fund
your own business and keep control.
There are other ways to do it.
For example, maybe you have access to a no-interest credit
card, and that's part of your strategy. You could also cash out your retirement
account or your investments, but you need to be careful about tax liabilities
if so.
If you do have the cash and you believe in your business,
putting it in might end up being the best investment you make.
Always Know the Numbers
No matter how you fund your startup, a big mistake new
entrepreneurs make is not necessarily knowing the numbers and keeping an eye on
their operating costs. You need to be able to take a holistic look at your
finances on a regular basis.
If not, you're not going to be making data-driven decisions.
You might miscalculate operating costs and other big expenses.
Prepare for a Change In Your Lifestyle
If you're really going to dive in and fund your own
business, you need to mentally
prepare yourself.
First, it may be years before you're paying yourself a
salary.
Can you do that? If you have a family, this may not be an
option for you at all, so you might have to explore other ways to fund your
business.
It's going to be more stressful when you're self-funding,
but that might drive you to work even harder because you have no option.
You might also need to be prepared for your business to grow
at a slower pace than if you had a huge amount of funding available to you.
What's good about that is that your growth is more likely to be sustainable.
You have to decide what's available to you and what
you're comfortable with ultimately.
