Self Financing Your Small Business

Self funding your business means providing the initial funds to start your business through your own personal means. Self funding your business may involve personal funds and assets, credit cards, and personal loans. The most common funding for small businesses comes from the founders’/owners’ personal savings.

Self funding allows the owners/founders of a business to retain equity in the business without saddling the business with ongoing debt payments during its early stages.

There are a number of ways to self fund a business without debt or equity financing.

Savings and Personal Funds - For most startups, the first source of funding is often the owner’s personal savings and resources. Self funding your business is as easy as putting money from your personal account into your business bank account. However, make sure this money (and everything you contribute to your business) is properly recorded as a loan or equity investment in your company’s accounting records.

Credit Cards - Another important source of funding for startups and small businesses are personal and small business credit cards. There are many different types of credit cards, each with its own mix of interest rates, fees, benefits, and rewards.

Take a look at our guide on How to Choose a Small Business Credit Card to find the right small business credit card for your business.

Personal Loans - Personal loans are another popular way to self fund a startup. Starting out, your business will not have any credit of its own. Thus, in order to secure any loan, you may have to take out a personal loan or personally guarantee a small business loan.

Retirement Accounts - Retirement accounts such as 401(k) plans and IRAs are also another way to self fund a business using your personal assets. If you only need short-term cash, you can often borrow from many retirement accounts for up to 60 days interest free. If you are looking for a more long-term solution, Rollovers for Business Startups (ROBS) allows you to roll over 401(k) plans and some other retirement plans - penalty and tax free - to invest that money in a startup.

Home Equity Loans - If you own a home, you may be able to tap into your home’s equity with a home equity loan or a home equity line of credit (HELOC) to start a business. Home Equity Loans typically carry much lower interest rates than credit cards and personal loans and should be considered in the mix of self financing available to startup founders.

Crowdfunding - Crowdfunding is raising money for a project or new venture from a large number of people (the crowd). Crowdfunding has become an increasingly popular way of raising startup capital, allowing entrepreneurs to raise money for projects and new ventures through pre-selling and support from their users, supporters, and fans.

Numerous startup ventures are started with little or no money, and many of them do it through bootstrapping. What is bootstrapping? Bootstrapping is utilizing the resources of the founder or co-founders with no outside help and starting lean.

This means that instead of taking on debt or selling equity in your company, bootstrapping relies on the resources that the owner(s) do have access to and starting small. The revenue of the business is then used to fuel growth.

There are several ways to bootstrap, including controlling costs and raising capital that does not affect the debt or equity of your business.

Controlling Costs

One of the first things you will need to do to bootstrap a new venture is control your costs. This means not taking on unnecessary expenses, not hiring anyone until you absolutely need to, and using your own sweat equity to start and grow your business.

For instance, many of the tasks related to running your business that you cannot do yourself, like accounting, payroll, website development, and creative work, can be outsourced to freelancers or outside companies.

Grants

Small business grants are free money (i.e., they do not have to be repaid) provided by federal and state governments, nonprofit organizations, and some corporations.

Grants typically provide money for a specific purpose or to a specific demographic. For example, there are a number of small business grants explicitly for women, minorities, immigrants, veterans, and even felons.

Since grants are free money, they are often highly competitive. There is also a significant amount of work that goes into both the application process as well as tracking and reporting what the grant money was used for. However, since your time is the only thing you have to lose, many people find pursuing grants a worthwhile endeavor.

Crowdfunding

Another way to raise funds with little to no money to fund your business is through crowdfunding. Crowdfunding is raising money for a project or new venture from a large number of people (the crowd). Crowdfunding has become an increasingly popular way of raising startup capital, allowing entrepreneurs to bypass traditional sources of funding and go straight to their users, supporters, and fans to raise money for projects and new ventures.

Two types of crowdfunding in particular may be used to raise money without taking on debt or giving up equity in your venture. The most popular type of crowdfunding for entrepreneurial projects and ventures is reward-based crowdfunding (think Kickstarter and Indiegogo).

Another type of crowdfunding used to raise capital without any additional debt or equity is donation-based crowdfunding. Donation-based crowdfunding is a type of backer-funded crowdfunding where the campaign creator(s) ask backers to contribute to a campaign without any type of reward or stake in the venture.

Like any form of funding for your business, there are pros and cons to self financing your venture.

Some advantages of bootstrapping include the following:

• You will be more mindful of how your business spends money.
• You won’t be saddled with payments on debt.
• Retain equity in your business.
• Retain decision-making and control.

Similarly, some disadvantages include:

• Your own money is at risk.
• You may run out of money before your business breaks even or turns a profit.
• Limited scale and scope of startup.
• Slower path to growth.