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Wednesday 19 October 2011

Self-Funding Pitfalls and How to Avoid Them


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.


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!

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