If you’re
determined to start your own business, but you’re business plan has been turned down by everyone
from banks to angel investors, then there’s still one business funding option
open to you: self-funding.
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Self-funding
is usually the last business funding option people choose, because let’s face
it, it’s the hardest one! However, if nothing else is working, and you know
you’re onto a great idea, it’s worth the effort.
In this
article, we look at some of the more common (although often ignored) pitfalls
of self-funding your business, and how you can avoid them.
Not Creating a Separate Legal Entity
When you
get funding from an external source, whether it’s a bank or a venture capital
firm, one of the primary criteria is usually that your company is a separate
legal entity. There are many reasons for this, but one of the biggest is that
it ensures that there is limited risk involved, for your financiers, and that
your personal finances are clearly separated from your company’s.
When you
decide to self-fund your business, you might choose to skip this step, – after
all, you’re not getting business funding per se, you’re bootstrapping, right?
However,
you should remember that self-funding is one of the hardest business funding
methods to succeed at, and if you haven’t protected your personal assets, by
creating a separate legal entity, in the form of a registered company, if your
idea doesn’t work, you stand to lose everything – including your personal
assets!
Bottom line?
Make registering your company a priority, and don’t do business until you have.
Being Overly Ambitious
It’s
completely natural to be enthusiastic and excited about your business. However,
if you haven’t found external business funding, you’re going to have to tone
down that excitement, and take it slow!
When your
business funding comes out of your own pocket, you’re going to need to be even
more careful. That means cutting your overheads to the bone, starting as small
as possible and expanding cautiously.
This is
especially true if you are getting your business funding from your home loan or
your retirement fund – the more money you can keep in the bank, while you start
and grow your business, the better.
Treating It As Your Money
When you
get business funding from an outside investor, you will have to keep careful
records of how it is spent, and on what. You won’t be able to use any of the
business funding you get for personal needs, and you’ll have to account for
every cent.
When you
choose the self-funding route, it’s easy to fall into the trap of not keeping
track as carefully. You might take money out of your home equity, or your
savings, and you might decide to spend some of it on personal items. Before you
know it, your capital is gone, and your business is not earning enough to keep
you afloat!
It’s very
important to treat self-funding as you would any other kind of business
funding. Make sure that every purchase and expense is justified by the
business, and recorded, and treat it as if you were answering to a board of
investors.
Yes, You CAN
The good
news is that self-funding is entirely possible, for a great many entrepreneurs.
In fact, whether you start your business with almost nothing, or whether you
have a small nest egg to draw from, if you are careful, it’s entirely possible
that you can build up a company that is a roaring success.
Just
remember that self-funding is the same as any other type of business funding.
You need to be able to show results for every purchase or expense, and you have
an investor – you!
