While starting a small business, most business owners think of paying for operational expenses directly out of their pockets. But, when the business starts to grow—or you need funding for working capital—its time to make a decision where to turn for additional capital. Some businesses apply for a small business loan, some look for venture capital for small businesses, and few turn to self-financing. Entrepreneurs who turn to own reserves aren’t the millionaires, or founders of successful companies, or with deep pockets. Surely, they’ll have a definite level of financial stability to self-finance their companies. But there are certain reasons as to why you should dip into your own pockets instead of securing funding from other sources. In addition, if that’s not the best route for you to take, read on the below-mentioned tips to ensure your business stays financially sound.
Bootstrapping” Your Business
You might know the phrase “bootstraps your small business”? To “bootstrap” a business means managing business with your own cash reserves, instead of depending upon other financial sources.
Bootstrapping your business generally made on a defined budget, since you’re investing your own money in. Most startup founders talk about getting their business bootstrapped where the majority weren’t self-reliant well-off, and didn’t have millions of dollars under their belts.
The bottom line is that many small business owners can self-finance themselves. And it doesn’t mean you can’t apply for a small business loan or raise venture capital later. Actually, many investors and lenders want to see that you’ve grown your business with a small amount of money. It also helps when you apply for funding with the Small Business Administration (SBA), because even they needs proof of your equity into the business.
The Pros and Cons of Self-Financing
Most small business owners self-finance their business at some point for almost any reason. While you’re evaluating your business financing options, review the pros and cons of self-financing:
The Pros of Self-Financing
- Putting your own money into the business means you own retain the ownership and equity in your small business. This is especially important for those entrepreneurs whose sustenance depends on their businesses.
- Self-financing puts you in control. When you offer equity for investment, you can leave off full control of your business. This may be because pressure from the investors or from your board seats or voting rights to change the direction of your company.
- When you’re spending your own money, you’ll likely spend it intelligently. Once you know that every business decision has a direct impact on your business, you’ll not only control your spending but also get more financial discipline.
- Another benefit of bootstrapping your business is that you don’t have to report any payments or financial statements to a lender or investor. There’s no worries of falling behind on loan payments or losing investors during slow months.
The Cons of Self-Financing
- The major drawback of self-financing is the lack of advisory and connections. Securing money from sources like angel investors or loved ones will allow you engage their networks as well. A business can benefit from this outside perspective. Even small business loans come with networks; for example, the Small Business Administration (SBA) has eccentric advisory resources for business owners within their SBA loan program. Moreover, building a stronger connection with lenders can help in terms of flexible terms and affordable rates.
- Growth is expensive and requires constant inflow of capital. You might need money to upgrade equipment, purchase quality raw materials or hire expert staff. And for that you need money, and this is where bootstrapping alone will not help.
- The concept of investing your money into the business is a risky endeavor. If things don’t work your way, you’re at
Understanding Personal Risk in Self-Financing
Separating your business and personal bank account is the best approach for every business, whether self-financed or not. Keeping separate accounts will also helps especially when you need to file your taxes. If you get in trouble with your company, it could lead to legal insinuations in the future. If the finances are not separate, you could put all of your personal assets in danger.
When Bootstrapping Is A Better Option?
Just like a small business loan or venture funding isn’t an appropriate financing option for everyone, self-financing isn’t for everyone, either. However, there are certain situations where bootstrapping is a better alternative for financing your small business. You should consider bootstrapping your business under the following situations:
- You already have some kind of debt
- You don’t need quick market saturation to make your product or service effective
- You can mature your idea without upfront capital
- You know you can work lean
- You’re an industry expert
- You have enough money to spend without draining your bank accounts
- You can endure risk.
Other Sources of Capital Sources
If you’re like most Americans, who don’t have a lot of money in your business bank account to bootstrap your business, consider other sources of capital. Your best options may include:
- Rollovers as business startups (ROBS)
- 401(k)/retirement funding
- Home equity business loans
- Personal business loans
Capital Management Approaches to Make Bootstrapping A Success
If you decided to bootstrap your business, there are certain capital management approaches you should be learning to keep your spending and accounting organized. Here is an overview of the capital management strategies to bootstrap your business:
- Monitor Your Costs
First things first, monitor your cost and evaluate your financial statements constantly. There are many things involve in cost management like monitoring industry trends for price fluctuations, cost analysis, budgeting, resource management, procurement and governance.
Reviewing your costs regularly can also help in the process. If you’re overspending than you should be, understand your spending triggers and consider getting a prepaid business debit card to limit your spending.
- Manage Cash Flow
Cash flow is lifeblood of every small business and the best indicator of your small business financial health. It indicate how much money you’re spending, how much you have on hand, and what are you spending it on.
The next step is to prepare and examine your cash flow statements, your monthly cash flow forecasts, and a cash budget, too. Formulating and reviewing all these documents will help you manage your short-term costs and margins – ultimately your cash flow.
Read for: Powerful Strategies to Manage Cash Flow
- Be Reasonable
With bootstrapping, you’ll be growing slower than a contemporary. Evaluate every opportunity you see and don’t be scared to get an objective perspective from someone you trust. Keep in mind that scale isn’t a powerful competitive advantage—considering you’re taking thoughtful steps, and the right ones, you’ll seize the success you need.
Self-financing a business certainly has a significant amount of risk in your business venture. If things, don’t go as planned, you don’t want yourself to be in a position where you exhaust your entire savings, or delete what you’ve saved for your retirement.
Before making a decision, ensure you understand your finances thoroughly. Work on understanding how much is required to have in your bank and in your reserves when considering self-financing. And don’t forget, there are small business loans available when you need quick funding. The better business decisions start with better-informed entrepreneurs.