Running a business is a constant round of decision making. Some of those decisions will be tiny ones, and some will be major, making a big difference in the success – or otherwise – of your company. One of the decisions you might need to make is how to fund that business; should you, for example, self-fund it?
Self-funding a business has many benefits, but it is important to note that there are some downsides to this idea as well. Read on, and you’ll see how both measure up, and hopefully, you can make the decision that is best for you, and for your business now and in the future.
The Pros
- It’s More Personal
Although there is an old saying about things not being personal because they’re business, this is not always the best way to look at things. You do need to be personal in your business if you want to sell in the easiest way; people like to be made to feel special when they buy, and having a personal touch can help to achieve this.
It can also be good to feel a personal link to your business in other ways. Starting a business and seeing your ideas grow will leave you with a sense of pride. This can also give you a drive to always seek to improve your business as and when possible and necessary.
This brings us to knowing your market. When you are using your own funds, you are building a brand and name for yourself that you truly believe in. Therefore, you will carefully consider your market, and give your all to conducting the necessary research to make sure any investment is worthwhile. People are often more careful with their own money. So, whether you have been following the latest lifestyle trends, the flashiest tech on the market, new additions to the sports industry, or marijuana news on CBD investments, you will give it your all, because you care.
Because it is your money, you will look after it and not spend it rashly. This can be a definite positive for your business.
- You Will Make A Plan
Planning for your business’s future is vital for its present success, but with so much going on and so much to do, this plan can often fall to the wayside and be neglected. In some cases, this could be because the business owner knows they can always apply for more funding when they need it, so they don’t really need to plan or budget.
When self-funding your business, you will have a finite amount of money to use, and therefore you will plan out exactly how to use it. Not only will this make your budget go further, but it will streamline your business and make it much more efficient.
- There Will Be No Debt
Having debt is something necessary in life. A mortgage is a debt, for example, and many people are more than happy to enter into an agreement to borrow many hundreds of thousands of dollars at a time. If you want to take a vacation, or need to buy a piece of equipment, taking out a loan might be the way to do it.
However, if you can avoid getting into debt in business, it will be a lot better for you in the long term. This is why self-funding can be a great benefit; you won’t owe money to anyone from the start, and to future investors, this can be the difference between a good prospect and a poor one for their money.
If you need to borrow money later down the line, not having debt at the start makes obtaining that money – either from an investor or a traditional lender such as a bank – a lot easier.
The Cons
- Personal Debt
If you have no savings or investments to use to self-fund your business, then you will need to look at loans of some sort to do so. This might be a traditional loan, or it could be a remortgage, or perhaps releasing some of your retirement funds. Whichever way it is done, it could leave you in financial difficulties if something were to go wrong within your business, and it couldn’t afford to pay you back.
Make sure you have a contingency plan for this should the worst happen, and enter into a legal agreement with your company so that you see a return on your money once profit starts to be made.
- Bad Credit
Bad credit is not something that people want in their lives. It can make obtaining loans, credit cards, and mortgages difficult, or even impossible. By using your own money to fund your startup, you could be making your credit score worse, even without realizing, and that could mean that any other plans you have such as buying a house or borrowing money to take a vacation may not be able to happen. Check your credit score regularly to ensure that nothing untoward has happened. If you have bad credit already, you may not want to run the risk of making it worse by borrowing more (even if that were possible).
- It Might Not Be Enough
When you are using your own money, there won’t be a never-ending supply of it, and once it is used up, it is gone for good. Do you really have enough to fund everything your startup needs to survive, thrive, and continue? You don’t want to start something, invest all of your money, and then be unable to finish it, losing the money in the process, because you didn’t have enough.
This is why financial planning in advance is crucial. Have a well thought out plan that states exactly where the money will be spent, and how much, and it will be easier. However, emergencies can occur, and this can have a detrimental affect on your pot of money.
Conclusion
In many respects, self-funding your business is a good idea. It will help you to build a good line of credit for the future, plus you will be able to start sooner because the funds will already be in place. However, without good planning it can leave you in difficulties. Plan well in advance and know how much money you need before you start, and you can feel more secure.
