As a current or future small businessperson, you know firsthand that starting a business is tough. The good news is that if you’ve made it this far you already have the drive to meet that challenge head-on. Your drive combined with your know-how can help your small business grow from humble beginnings to a successful enterprise.
Like most people involved with a small business, your drive and know-how could probably use a little extra boost. That “boost” often comes in the form of money, often working capital, to get a business off the ground and running smoothly. Many small business people wonder where that money will come from. For many, the answer to that question is probably their own pocket. While using your own money to start a business might add to the other challenges you’ll face, it can also provide many benefits. The key for small business owners is maximizing the benefits of using your own money, while minimizing the risks.
This post will cover the ins and outs of financing a business on your own. You’ll learn about the various options for self-funding a business, as well as the advantages and disadvantages of doing so. We’ll also showcase ways you can save money as you fund your business and get it off the ground.
Self-funding is probably the most popular choice for potential small business owners. The reason for this is pretty straightforward: While you may prefer to bring in outside investors and lenders, both groups prefer to give money to people and businesses with proven track records. A small business just starting out may not have adequately built up its brand and reputation enough to entice outside investment.
This does not mean that you have to go it entirely alone when it comes to starting a business. Here are some of the options for self-funding and partially self-funding your business. Keep in mind that there are risks anytime you use your own money. Do your research and ask around before settling on a single option.
Savings
You’ve got a great idea, a sound business plan, and the ambition to take on big challenges. If this sounds like you, consider funding your business using your own money, such as personal savings, money you’ve regularly set aside from a day job, or even money drawn from your retirement funds. Make sure, however, that you’ve planned carefully. You want your business to sustain you for a lifetime, not drain your resources.
Debt
Not everyone has enough in their personal savings to cover the cost of starting a business. Many small business owners also use debt, usually in the form of credit or a refinanced mortgage. Our earlier advice applies here as well. Plan carefully, rather than assuming you’ll be able to pay off the debt quickly. After all, your business may not be profitable right away.
Family and Friends
If you have a friend or family member eager to partner with you, consider bringing them in as a partner to assume a share of the risk. Small businesses can (and do) fail and so money from friends and family can be lost. Make sure both you and they know the risks since the subject of money can put a strain on relationships.
Crowdfunding
This is a relatively new option that has become more common with the rise of services like Kickstarter and GoFundMe. These services draw in users, who each pay a small amount of money for things like early access to a business’s products or services. Many crowdfunding efforts fail so do your research, especially when it comes to creating a compelling pitch.
There are many rewards involved in starting and running a business on your own. You’re working for yourself instead of someone else and your success is directly related to your own hard work and careful planning. There are also risks. Let’s talk about both.
Self-funding your business can pay off in the following ways. For one, you have sole ownership and control over your business and don’t need to share revenue or profits with shareholders. That sole control can also encourage you to be more thoughtful about how you spend money for things like business equipment, office space, and inventory. After all, if you’re putting your money on the line, you can’t afford to be extravagant with business expenses.
While ownership and control are two of the advantages of self-funding, there are some drawbacks. Most small business owners need to think long-term. While there are a few overnight successes in business, most savvy business owners know they need to be in it for the long haul. You need to be prepared for eventualities like slow growth.
We’ve all heard about companies who receive enormous amounts of money in their early stages. However, if you self-finance your business, you need to be prepared to take things slowly since you won’t have the same opportunity for explosive growth as a company backed by outside investors.
Most importantly, if you self-fund your business you run the risk of bankruptcy or going further into debt. Fortunately, there are ways you can lessen the risks of self-funding.
Plan
We mentioned the importance of planning several times in this post. Carefully assess how much money and resources you have and where it’s coming from. Draw up a detailed business plan that shows to yourself and others how that money will be used. You should also devote time to thinking about emergencies that may require you to spend more money than you originally thought. To quote the Boy Scouts: Be prepared!
Be creative
Steve Jobs had a contract to deliver early models of the first Apple computer. The problem was he didn’t have any money to buy parts to assemble those computers. He used that initial contract, however, to negotiate favorable terms with a parts supplier. Once he delivered those computers he was able to pay back that parts supplier and earn a tidy profit. What can you do to stretch or save your money?
It’s a fact of life and business: money helps start a business and keeps it running smoothly. While every small business small would prefer to focus on serving their customers over worrying about money, it pays to be thoughtful about money at every stage of your business’s lifespan. Don’t assume in the early stages that all the money to start a business needs to come out of your savings. Do your research. Spend wisely and save like your business depends on it. Your business’s bottom line will thank you for it!