Published 16 May 2018 Category: Entrepreneurs, SMEs, Startups, Business, Funding

Should You Fund Your Business Yourself?

The famous 17th century author John Ray, was known to have written the aphorism, "Money begets money." In the business world, you've also heard the saying, "You've got to have money to make money."

It can be extremely challenging to find the money to start a business. In fact, this is one of the biggest hurdles most entrepreneurs face. There are many options - small business loans, investors, small business grants, self-financing, crowdfunding - but the process of zeroing in on the one funding option that is best for your business may not be a clear-cut process.

So, what are some things you should consider when you’re looking for capital to start your business? The biggest question is: should you fund your business yourself, or should you use other people’s money to get your business off the ground? Here is a look at each option.

Your Money vs. Other People’s Money
Self-financing is one path of small business funding, and it includes using your savings, home equity, stocks, bonds, retirement accounts, and credit cards to fund your business. When you go this route, you are very likely to use some bootstrapping techniques to get more bang for your buck. The problem with this is that you may not have enough liquidity to move at the pace you want. And most importantly, it’s risky. You are completely on the hook for the success or failure of your business when you do it alone.

Other people’s money is the second path. It comes in many forms including bank loans, investors, family and friends, venture capital and angel investors, crowdfunding, and vendor financing/leasing. Perhaps one of the greatest "secrets" of the richest people in the world is summed up in those 3 words: Other People's Money - OPM for short. If you took a cross-section of the most affluent business people, you'll find that the majority of them launched their fortunes using OPM.

Why Use It
The use of other people's money has become such an ethical and acceptable mainstay in business because one can leverage other people's money to your benefit. For example, you can leverage borrowed money into high-yield investment programs that could generate a return that would then pay back your lender and line your pockets as well. Or you can leverage borrowed money into asset-producing or income-generating real property. Or you can simply borrow money to start or grow your business.

The benefits to using other people’s money are obvious: 1) When you use other people's money, especially within the parameters of a corporation, your debt is assigned to your business, and your debtors can make no claims against your personal finances; and 2) the infusion of cash allows you to have money to make money for your business.

Using other people’s money also buys you time and gives you an opportunity to do things in your business you may not have been able to do if you financed it yourself. You have more options, increased reach, and the ability to make a bigger impact much quicker as you start your business.

Reasons Not to Use It
Sounds great, doesn’t it? It sure does! But before you head out to look for an investor, consider these reasons not to use other people’s money.

The biggest reason some entrepreneurs avoid using other people’s money is that they don’t want to lose control of the business. In most cases, you will typically have to relinquish a significant amount of ownership and control. You’ll have someone else to answer to and the decisions to be made are no longer just your own.
This also means your business goals will likely change, and sometimes even your business idea itself will morph into something larger, or just completely different. This can actually be a good thing, but you have to be open to this type of change and flexible enough to adjust the big picture you had before.

Another reason using other people’s money is dangerous for small business owners is that you are making a lifetime commitment to someone else - the lifetime of your business; that is. Getting external funding is like a marriage; it’s structured and it has legal ramifications. It can also be hard to get out of it if the relationship goes sour.

If these reasons aren’t enough to turn you away from using other people’s money to start your business, then you have your work cut out for you. The competition for other people’s money is fierce, so make sure you have a solid business plan in place and that you’re ready to put in the elbow grease to locate the capital you need.

Most small businesses piece together their funding from several different sources over time. No single source of funding is necessarily better than another. It depends on your business model, projections, your living expenses, access to resources, your runway, credit score, cost of capital, your willingness to bootstrap, and how well you can sell yourself and your business to potential financial partners or investors.

Whether you are a startup seeking initial seed capital or you’re already operating a small business and looking for money to grow or invest in equipment, you have to be flexible, stay persistent in your efforts, keep accurate financial numbers, perfect your pitch, network continuously (when appropriate), and maintain a positive outlook. The simplest way to get the money you need for your business, with no strings attached, is to do it yourself.