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. As a result, these entrepreneurs often have to get creative with their finances to keep their businesses going. Furthermore, it can take time to find customers or clients who trust a young, untested brand, so you may have to maintain a full-time job for longer than anticipated just 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 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 a unique mix of individualism and optimism. These individuals have always dreamed of running their businesses and being their own bosses. So even though most small business owners start their careers working for other companies, they always keep the end goal in sight.
Eventually, aspiring entrepreneurs fall in love with a business idea. That kernel sticks with them as they refine their concept. After they research the market, write a business plan and prepare to run their own company, business owners have one final hurdle to clear: They need money.
How to self-fund your business
Self-funding a business is more complex than going through a bank or venture capitalists. Here are four steps for securing enough funds to start your business.
1. Set up a business bank account.
The first step to self-funding your business is opening a separate bank account, typically a business checking account. Separating your personal funds from your business funds protects your assets, especially if you’re using your personal funds to finance your business.
Tip: There are several checking account options, but look for an account that enables online bill pay, doesn’t require a minimum balance, and won’t charge for overdrafts.
2. Analyze your potential sources of income.
Once your business checking account is open, consider your potential sources of funds to help finance your business. While there are several options to pursue, each avenue carries certain risks because you’re relying on your personal assets to fund your company. If you’re having trouble deciding which funding option is best, create a pros and cons list to objectively assess the potential benefits and liabilities associated with each one.
Possible sources of income include the following:
- Cash from your personal checking or savings accounts. Before you look into potential funding options for your business, review your personal finances, including your checking and savings accounts, to see how much you can contribute directly to your business.
- Rollover for Business Startups (ROBS). ROBS is an option that allows you to take funds from your retirement savings account — without the typical taxes and penalties associated with an early withdrawal — to finance your business.
- Asking friends and family. Once you’ve reviewed your assets, ask your closest friends and family whether they’d be willing to financially support your business either as a gift, for an equitable stake in the company, or as a loan with flexible repayment terms.
- Bootstrapping. Bootstrapping means re-investing your earned revenue into the business to continue expanding your company. Many entrepreneurs opt to bootstrap rather than seek funding from an external source since it allows them to retain complete control of the business.
- Crowdfunding. Crowdfunding is a relatively new way to finance a startup, but several businesses have successfully done so in recent years. There are two ways to crowdfund your business: Ask for cash from general backers or earn the funds through product presales. Product presales are the more common avenue to crowdfund because funders are rewarded for their contributions with a bonus gift or discount in addition to being one of the first to receive your product(s).
3. Transfer your personal funds.
If you’re transferring personal funds to finance your business, you can classify those transactions as either a loan or equity in the company. Make sure you correctly categorize and track these transactions to ensure accurate tax records.
4. Accurately record the transaction.
When you’re funding your own business, especially if you’re dipping into your personal accounts, use accounting software to document your transactions consistently. Not only do you need to record all of your business expenses for tax purposes, but you also need to understand the fundamentals of your business’s finances. That includes managing all incoming and outgoing payments and knowing your company’s monthly expenses.
Did you know? Plenty of highly rated business accounting software options can track invoices, inventory and bill management, and connect to your bank account for easy bill pay.
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 doing as much work on your own as possible in the early stages. The fewer people you have to pay, the more easily you’ll keep your start-up costs to a minimum. If there is crucial work you can’t do yourself, think outside the box. For example, if you need a developer to design software, consider asking a developer you trust to co-own the business rather than paying them directly for their services. [Explore the difference between applying for an SBA loan vs. from an alternative online lender.]
2. Maintain outside income.
Most self-funded entrepreneurs will tell you it takes years of hard work before your business is profitable. However, many people don’t realize that it can even take months — or years, depending on the industry — to generate revenue. During your business’s early stages, maintain additional income streams to fund your company. While going all in may give you more time to develop the business and make it profitable, you’ll likely burn through your savings before that happens. 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 and running a fledgling business is no easy feat. Many entrepreneurs will tell you it’s one of the most challenging things they’ve ever done. However, until you can devote all your time and energy to your company, managing your time carefully and wisely will be crucial to your success.
If you reach a point where your business starts to interfere with your full-time job, look for creative solutions that will allow you to devote more time to your company. In some cases, you can negotiate a more suitable arrangement with your employer, such as working remotely or transitioning to independent contractor status.
4. Pay your bills.
You’ll be amazed by how quickly money disappears when you start a business. Many self-funded entrepreneurs take out credit cards or refinance their houses until their business is profitable. Always pay your bills on time to give your business the best chance to become profitable. Responsibly managing your debts will help you maintain good credit and develop positive relationships with banks, opening up opportunities for you and your company further down the road. Chances are you will have to sacrifice some luxuries to pay monthly minimums and the mortgage, but failure to pay bills can devastate a young business.
5. Get as much credit as you can.
Consider asking the bank to increase the credit lines on your cards when starting out. You may even want to refinance or take out equity on your home, especially if you qualify for a low interest rate. When you switch from a full-time job to self-employment, your income may drop significantly or even go negative. If you apply for a new loan or open new lines of credit that accrue debt, your credit score will inevitably dip. When this happens and you can’t make the minimum payments, the new banks won’t be as open to working with you or your business. [Learn how to finance your business with no-interest credit cards.]
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; many entrepreneurs do. That’s why it’s critical to savor the small victories during your company’s infancy. Enjoy onboarding that first client, receiving your first check, and the day your books finally turn from red to black. These moments will keep you motivated to push through setbacks and doubts.
7. Be patient.
You will have to make sacrifices to self-fund your business. In extreme cases, some entrepreneurs put most of their home’s equity into the business and accrue debt on over a dozen credit cards. As a result, there may be times when you think you have gone crazy or that your business should be more successful than it is.
Be patient. Most self-funded business owners will tell you the early days of their business were the most difficult times of their lives, but they wouldn’t change a thing.
If your ultimate goal is to sell your business for a profit, self-funding probably isn’t the right option for you. On the other hand, if you want to own your business — with all the challenges and successes that entails — then self-funding might be the way to go.
Additional reporting by Dan Roberge.