Investing your own money in a business is not for the faint of heart. Any self-funded business owner will tell you that it takes years to get a company off the ground. As a result, these entrepreneurs often have to get creative with their finances to stay in business. Plus, it can take time to find clients and customers who trust a young, untested brand, so you might have to hold down a full-time job for longer than expected just to keep the lights on. It may not happen.
Despite the long and difficult road, most self-funded business owners will say they wouldn't change a thing. Here's why entrepreneurs put their own money into their businesses, and some steps you can take to do the same.
The idea of running a business with your own funds
Entrepreneurs are characterized by a unique combination of individualism and optimism. These people have always dreamed of running their own business and being their own boss. Therefore, most small business owners always keep their end goal in mind, even when they start their careers in other companies.
Eventually, an ambitious entrepreneur falls in love with a business idea. That kernel also sticks as they refine the concept. After researching the market, creating a business plan, and getting ready to run his own company, there's one final hurdle a business owner must clear. That means you need money.
How to self-fund your business
Self-financing a business is more complicated than going through banks or venture capitalists. Here are his four steps to securing enough money to start your business.
1. Set up a business bank account.
The first step to self-funding your business is to open another bank account, usually a business checking account. Separating your personal funds from your business funds protects your assets, especially if you are using your personal funds to finance your business.
There are several checking account options, but look for one that allows online bill payments, doesn't require a minimum balance, and doesn't charge overdraft fees.
2. Analyze potential income sources.
Once your business checking account has been opened, consider the sources of funding that may help you finance your business. There are several options to pursue, but each path comes with a certain amount of risk since you rely on your personal assets to finance your company. If you can't decide which financing option is best for you, make a list of pros and cons and objectively evaluate the potential benefits and liabilities associated with each.
Possible sources of income include:
- Cash from a personal checking or savings account. Before considering potential financing options for your business, review your personal finances, including checking and savings accounts, to see how much you can directly contribute to your business.
- Rollover for Business Startups (ROBS). ROBS is an option that allows you to withdraw funds from your retirement savings account to fund your business without the typical taxes and penalties associated with early withdrawals.
- Ask friends and family. Once you have reviewed your assets, ask your closest friends and family if they would be willing to support your business financially, whether as a gift, an equal stake in your company, or a loan with flexible repayment terms.
- bootstrap. Bootstrapping means reinvesting the profits you earn back into your business to continue expanding your company. Many entrepreneurs choose to bootstrap rather than raise capital from external sources because it allows them to maintain complete control of their business.
- Crowdfunding. Crowdfunding is a relatively new way to fund startups, but several companies have found success in recent years. He has two methods for crowdfunding a business. One method is to raise cash from the public's supporters, and the other is to obtain funds through pre-sales of the product. Product pre-sales are a more common method of crowdfunding. Because the funder, in addition to being one of the first users to receive the product, will be given bonus gifts and discounts for his donation.
3. Transfer personal funds.
If you're transferring personal funds to finance your business, you can classify those transactions as loans or company stock. Be sure to properly categorize and track these transactions to ensure accurate tax records.
4. Accurately record transactions.
If you're funding your own business, use accounting software to consistently document your transactions, especially if you're putting money into a personal account. Not only do you need to record all your business expenses for tax purposes, but you also need to understand the basics of business finance. This includes managing all deposits and withdrawals and keeping track of your company's monthly expenses.
There are many top-rated business accounting software options that let you track your invoices, inventory, invoice management, and connect your bank account to easily pay your bills.
Top tips for entrepreneurs considering self-financing
1. Pay as few people as possible at first.
The first way to prevent young businesses from dying out is to do as much work as possible themselves in the early stages. The fewer people you have to pay, the easier it is to minimize your initial costs. If there is an important task that you cannot do yourself, think outside the box. For example, if you need a developer to design your software, consider asking a trusted developer to co-own your business rather than paying them directly for their services.
2. Maintain outside income.
Most self-funded entrepreneurs will tell you that it takes years of hard work before a business turns a profit. However, many people don't realize that it can take months, or even years in some industries, to generate revenue. During the early stages of your business, maintain additional sources of income to fund your company. If you go all in, you may have more time to develop your business and become profitable, but you may deplete your savings before you can. Many companies take years to transition all owners to the company full-time, and that's okay.
3. Be flexible.
Juggling a full-time job and a fledgling business is no easy task. Many entrepreneurs will say this is one of the most challenging things they've ever done. However, until you are able to dedicate all your time and energy to your company, managing your time carefully and wisely is essential to your success.
If your business starts to interfere with your full-time job, look for creative solutions that allow you to spend more time at your company. In some cases, you may be able to negotiate better arrangements with your employer, such as working remotely or moving to independent contractor status.
4. Pay your bills.
You'll be surprised how quickly money disappears when you start a business. Many self-funded entrepreneurs use credit cards or refinance their homes until their business becomes profitable. Always pay your invoices on time to give your business the best chance of making a profit. Managing your debt responsibly will help you maintain good credit and build a good relationship with your bank, increasing opportunities for you and your company in the future. You'll probably have to sacrifice some luxuries to pay your monthly minimum and mortgage, but failing to pay your bills could be devastating for your young business .
5. Give as much credit as possible.
Consider asking your bank to increase the credit limit on your card when you start using it. You can also refinance or take equity in your home, especially if you qualify for a low interest rate. Switching from a full-time job to self-employment can result in a significant decrease or negative income. Applying for a new loan or opening a new line of credit that incurs debt will inevitably lower your credit score. If this happens and you can't make the minimum payments, the new bank will not be willing to work with you or your business.
6. Find happiness in small victories.
If you decide to self-fund, the journey will almost certainly be longer than if you had the help of a venture capitalist. You may face years of struggle. Many entrepreneurs do this. That's why it's important to enjoy small successes in the early stages of your company. Enjoy the day you onboard your first client, receive your first check, and finally turn your books from red to black. Moments like these keep you motivated to overcome setbacks and doubts.
7. Be patient.
You have to make sacrifices to self-fund your business. In extreme cases, some entrepreneurs put most of their home equity into their business and end up with debt on more than a dozen credit cards. As a result, you may think you're crazy or that your business should be more successful.
be patient. Most self-funded business owners will tell you that the early years of their business were the most difficult time of their lives, but they wouldn't change a thing.
If your ultimate goal is to sell your business for a profit, self-financing probably isn't the right option for you. On the other hand, if you want to own your own business with all its challenges and successes, self-funding may be the way to go.
Additional reporter Dan Roberge.