When planning for the a new venture, be mindful that as much at 90% of all funding for your start-up comes from self financing.
By: Hitesh Khan/
When planning for the financing of a new venture, the reality is that as much at 90% of all funding for start-ups comes from the entrepreneur, family and friends. However, many entrepreneurs seem to balk at the idea of relying too much on their own money. Beyond just the fact that for many new businesses this may be the only choice, there are clear advantages and disadvantages for the entrepreneur to rely on their own funding.
First the pros of self financing:
- It is the easiest and quickest money to secure. Nobody has to be convinced and no approval process is required.
- It eliminates the complexity of adding more partners or shareholders. Many experienced entrepreneurs will tell you that if they do another deal they will do a deal that they can create without partners. It seems at times that managing partners can be as much of a challenge as managing the actual business!
- Only the entrepreneur’s aspirations need to be considered. For example, if the entrepreneur wants to keep the business small to fit her lifestyle, he or she can without anyone second guessing her.
- All of the profits and wealth go to the entrepreneur. There is no dilution effect. With more partners the entrepreneur has to grow a business larger to meet his personal goals for income and wealth plus those of the other partners.
- When the time comes to exit the venture, the process is relatively simple. There are not competing interests to negotiate.
There are also cons to self financing:
- Limited resources limits can limit the size and scope of the business at start-up.
- Limited resources can also limit the growth of the venture into the future.
- The entrepreneur is the only one at risk. If the venture fails, all of the consequences are the entrepreneur’s to deal with.
- The entrepreneur may not have all of the skills, knowledge and experience needed to successful launch and grow the venture.
Self financing, which is sometimes referred to as Bootstrap financing, is probably one of the best and most inexpensive routes an entrepreneur can explore when raising capital.
Bootstrap financing is a unique way of financing your business goals without actually going into debt. Most people who engage in bootstrap financing want to avoid taking out loans. They also likely have a relationship with their business community that allows them to survive on very little cash. Bootstrap financing does not work for all types of businesses due to the way it is carried out.
But be mindful that self financing would require you to live within your means, watch costs carefully, find alternatives to cash for building the team and expand the business infrastructure.
With bootstrap financing, entrepreneurs who use their own money or personal assets to get their startup going incur a huge financial risk, especially if the business fails. Bootstrapping means your entire startup rests only on you. If you make a profit, that’s great. If you don’t, you could lose everything. For many startup owners, they forgo a salary in the beginning months. So, if you fail, you’ll have spent time without an income as well.
The financial risks to bootstrapping are huge, so owners must have a plan for moving forward. Also bootstrapping often means that you are without capital for your business expansions and so your growth may be slow. Bootstrapping means you are most likely operating with limited resources and very little staff to help you.
But for business expansion, you need funds and you need to borrow not when you are in the pits, but when you are healthy and growing. This is because no lender will lend to any company which is down and out or in the red for an extended period of time.
The challenge for start-ups is, not many banks may want to lend to you. This means that you would have to rely on non-traditional sources to secure the extra funding that you need to grow your business. Besides relatives and friends, start-ups can also view licensed moneylenders as a means to securing the extra funds needed to grow their business, or simply to tide over a difficult period.
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