It can take years to get your vision off the ground, but the rewards of owning every aspect of your company is worth the hard work of bootstrapping. Here's how you can self-fund your business idea.
Self-funding a business is not for the faint of heart. Any business owner who self-funded their business will tell you it takes years to get a company off the ground. These entrepreneurs often have to get creative with their finances in order to keep their businesses going. Furthermore, it can take time to find customers or clients who trust a young, untested brand, which means you'll likely have to maintain a full-time job to keep the lights on.
Despite the long, bumpy road, most self-funded business owners will also tell you they wouldn't change a thing.
Here are a few reasons why entrepreneurs self-fund their businesses and the steps you can take to do the same.
The idea of self-funding a business
The hallmark of an entrepreneur is that special mix of individualism and optimism. These individuals have always had the dream of running their own business and being their own boss. Even though most small business owners started their careers working for other companies, they didn't lose the drive to be their own boss.
Eventually, these aspiring entrepreneurs fall in love with a business idea. That kernel sticks with them, and they start refining their idea with friends and family. After researching the market, writing a business plan and making the decision to run their own company, business owners have just one problem: They need money.
Seeking angel investors to fund a business
One of the biggest decisions any business owner has to make is whether or not to self-fund. Obtaining funding from outside sources definitely offers compelling advantages, but the drawbacks can be steep as well. When you are ready to really make a go at your business, reach out to both angel investors and venture capitalists to see if either option is feasible for you.
If, however, each meeting leaves you feeling less enthusiastic, you will have to ask yourself whether you want to give away a significant portion of your company. Many small business owners do receive interest from angel investors, but decide the investors want too much of their company for too little money.
If you decide not to work with investors, understand and prepare for the fact that the road to success is going to be longer and harder, but the payoff will also be bigger in the end.
Funding a business through a bank
After saying goodbye to your investor offers, your next stop is probably going to be the bank. Regardless of your sound business plan, clear road to revenue or entrepreneurial optimism, banks are likely not going to be impressed. Even though business development banks exist to provide loans to entrepreneurs, they're seldom enthusiastic about an unproven business.
Banks are much more interested in lending to highly profitable and fast-growing businesses – they'll practically knock down your door to offer loans once you are successful. The most difficult thing about business loans is that the best way to qualify for one is to not actually need a loan.
If you are denied business loans from nearly every bank in your area, you may have to face a harsh reality: If you want to get your business off the ground, you'll have to do it on your own. The decision to self-fund is scary, but it has motivated many people to create successful companies, because they have serious skin in the game. The journey will be long and hard, and you will have many doubts along the way, but with a sound business plan, determination and hard work, you have a good chance to make it.
Important tips for entrepreneurs considering self-funding
1. Pay as few people as possible in the beginning.
The first thing that prevents young businesses from dying on the vine is to do as much work as you can yourself in the early stages. The more time you can personally dedicate to your business and the fewer people you have to pay, the better. If there is crucial work you can't do yourself, think outside the box. For example, if you need a developer to design software and make countless revisions, consider bringing on a developer you trust as a co-owner of the business, rather than pay a normal developer's rates for all that work.
2. Maintain outside income.
Most self-funded entrepreneurs will tell you it takes years of hard work before your business will be profitable. What many people don't realize is that it can take months – or years depending on the industry – to even start generating revenue. During the early stages of your business, you should maintain outside income to fund your company. While going all in may give you more time to develop the business and make it profitable, you will burn through your savings in no time. For many businesses, it takes years before all owners transition to the company full time, and that's OK.
3. Be flexible.
Juggling a full-time job with a fledgling business is no easy feat. Many entrepreneurs will tell you it's one of the most difficult things they've ever had to do. Until you are able to devote all of your time and energy to your company, you'll have to work grueling hours and manage your time carefully.
If you reach a point where your business is starting to interfere with your full-time job, think creatively for ways you can devote more time to your company. In some cases, you may be able to negotiate a more suitable arrangement with your employer, such as working remotely or transitioning to independent contractor status. Whatever the case, be flexible and look for creative ways to spend more time building relationships with your young company's customers.
4. Pay your bills.
You'll be amazed at how quickly money disappears when you start a business. Many self-funded entrepreneurs take out credit cards or refinance their house until their business is profitable. The key is to always pay your bills on time. This will help you maintain good credit and develop positive relationships with banks, which will open up opportunities for you and your company further down the road. Chances are you will have to sacrifice some luxury to pay monthly minimums and the mortgage, but failure to pay a bill can be devastating to a young business.
5. Get as much credit as you can.
When you're starting out, you should consider asking the bank to increase your credit lines on your cards. Consider refinancing and taking out equity on your home even if you don't think you need to, especially if you qualify for a low interest rate. As you open more credit cards and accrue debt, your credit score will go down. When you switch from a full-time job to self-employment, your income may drop significantly or even go negative. When this happens, banks won't want to work with you or your business.
6. Find happiness in the little victories.
If you decide to self-fund, your journey will almost certainly be longer than if you took a helping hand from a venture capitalist. You may face years of struggle, like many entrepreneurs do. In the early years of your company, savor the small victories. Enjoy bringing on that first client, receiving that first check and that day when your books finally turn from red to black. These are the things that will keep you going and hungry as you push through setbacks and doubts.
7. Be patient.
Ultimately, you will have to give up a lot to self-fund your business. In extreme cases, some entrepreneurs put most of the equity of their house into the business and run up debt on over a dozen credit cards. Luxury living, such as eating out at fancy restaurants or taking nice vacations, will have to go on hold as you work on your business in the morning, on your lunch break and at night. There will be times when you think you have gone crazy and that your business should be more successful than it currently is.
Just remember to be patient. Most self-funded business owners will tell you the early stages of their business were the most difficult times of their lives, but they wouldn't change a thing.
If your goal is to build a business as quickly as possible and then sell it for a nice payday, self-funding probably isn't right for you. If you want to own your business – with all the challenges and successes that entails – and have the stomach for it, then self-funding might be the way to go.
Dan Roberge contributed to the writing in this article.