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When you’re beginning your business, it makes sense that you’d pay for expenses directly out of your pocket. But if you want to accelerate your growth—or need business financing for other reasons—you’ll have to make a decision about where you’re going to seek out additional capital. Some entrepreneurs decide to apply for a small business loan, while others look for venture capital in the form of angel investors for small business.
Others choose to turn to their own reserves. These individuals aren’t always millionaires, founders who have had previous success selling companies, or those with just generally deep pockets. Sure, you’ll have to have a certain level of financial stability in order to self-finance your company. But if you can pull it off, there are reasons you might want to consider it.
We’ll explore reasons why small business owners might want to dip into their own pockets instead of turning to others for funding. Plus, if that’s the route you go, we’ll provide tips to make sure you keep your business solvent.
When we’re talking about self-financing, we don’t just mean paying off your own business credit card bills as you’re buying supplies for your Etsy shop. Because, although that’s technically self-financing, this discussion is on a bigger scale. What many call “bootstrapping” your business.
You know the phrase “pulling yourself up by your bootstraps”? You see where we’re going with this. To “bootstrap” a company means starting and running a business with all of your own cash, and not relying on any external sources for help.
When you self-finance—or bootstrap—your business, you generally do it on a fairly limited budget since you’re putting your own money in. When many small business owners or startup founders talk about getting their start, they often talk about bootstrapping their business. And the vast majority weren’t independently wealthy, and didn’t have several multimillion-dollar exits under their belts from past endeavors.
The bottom line is that lots of entrepreneurs can self-finance their companies. And just because you do doesn’t meant that you can’t raise venture capital or outside funding later. In fact, many investors like to see that you’ve grown your business on a shoestring. And, when you apply for SBA loans, the Small Business Administration even requires proof that you’ve put equity into your business—both in the form of your sweat and your capital.
The vast majority of small businesses self-finance, at least at some point: More than two-thirds of small businesses rely on their own money. There are lots of reasons why you’d choose to go after alternative sources of capital—and, also, why you wouldn’t.
As you’re evaluating your options for business financing sources, look at both sides of the self-financing coin:
Before we go ahead, let’s go back to that point about your separate finances that we mentioned in the last section. Opening up a business bank account, or establishing a business entity, is often easy to overlook in nascent days of starting up. Especially if you didn’t consciously start your business with a capital S, so to speak—maybe it was a freelance project that got bigger or a hobby that began to net you some cash that you took full time.
Every business owner, self-financed or not, needs to have a separate business and personal bank account. Keeping your personal dealings and company dealings separate is essential come tax time. But it also could have legal implications later down the line if you get in trouble with your company. If there’s no distinct line where personal ends and business begins, you could put all of your personal assets in jeopardy.
Just like taking on a small business loan or venture funding isn’t for everyone, self-financing isn’t for everyone, either. But there are better situations than others for choosing to finance with your own money.
It’s not always possible to stay in the black if you’re self-financing your business.
If you, like most Americans, don’t have a business bank account overflowing with dollars to bootstrap your company, you might need to look into a few other resources for larger sources of capital. Your best options include:
If you choose to self-finance your company, you’ll want to commit to some specific capital management strategies to keep your spending lean and your accounting efficient. That way, your money will go further which will, hopefully, allow you more runway for growth.
This one almost goes without saying… almost.
Managing your costs isn’t a one-time process; it’s a constant evaluation of your P&L. There are dynamic pieces, like keeping an eye on industry trends so you can anticipate if the price of your raw materials might go up, which will affect your cost of goods sold (COGS). But there are other things that you can do, too, to streamline your spending—for instance, not getting office space until you need it.
Audit your fixed and variable costs on a regular basis. If you find that you’re spending more than you should be, consider even getting a prepaid business debit card that you pre-load with your budget for the month so you literally can’t spend beyond it.
Cash flow is the single most telling indicator of your company’s financial health. How much money do you have on hand, where is it going, and what are you spending it on?
Draw up and analyze your cash flow statement, which you can complete within your business accounting software. But also create monthly cash flow forecasts and even a cash budget, too, so you have all of the pieces you need. Three documents together are better than one, since they all affect each other and will also help you manage those short-term costs and margins.
In other words, be reasonable. Although you always want to strive to achieve big things, it’s helpful to just understand that bootstrapping your business necessarily means that you’re going to grow slower than a contemporary with a $3 million cash infusion behind them. When you see opportunities arise, be extremely critical with how you evaluate them, and don’t be afraid to ask for an objective perspective if you have a trusted outsider to turn to.
Remember, though, that bigger isn’t always better—as long as you’re making deliberate moves, and the right ones, you’ll find right-sized success, too.
There’s no way around the fact that there’s certainly a more substantial amount of risk in entirely self-financing your business venture. If something doesn’t turn out as planned, you don’t want to be in a position where you deplete your entire nest egg, or drain what you’ve worked hard to save for in retirement. On the other hand, there’s nothing quite like experiencing success and owning every cent of your profits.
Before you decide which direction to go, make sure you deeply understand your finances. You’re best working with an accountant to really understand the kind of money to have in the bank and in reserves. And also remember that you can explore small business loans to see all of your options, too. The best decision is the most informed one.