If you have an idea for a business, deciding how to fund the startup will be one of the most important decisions for you as a future business owner. It will determine the business's trajectory, growth, and success.
There are various ways to fund your business: crowdfunding, angel investors, or venture capitalists. However, self-financing is the most common route taken by first-time entrepreneurs who might not have access to capital from venture capitalists or other investors.
Self-financing, or bootstrapping, means funding your business with your finances. The money could come from personal savings, business credit cards, or a home equity loan.
Now, even though self-financing has several benefits, it doesn't come without risks. Keep reading this article to learn about the common pros and cons of self-financing your business.
The three significant advantages of self-financing a startup are:
1) Total control
Self-financing gives you total control and autonomy over all the decisions you make regarding business strategies and operations without any investors constantly questioning you. You can lead your business however you want without constantly convincing investors of a business plan you want to pursue.
You will also have greater control over money as no bank would limit it, and you will not have to worry about payments to keep your business credit in check.
Also, you will be able to enjoy total control over business expansion. It's often difficult to expand businesses if affiliated with a bank or venture capitalists, as a lot of funding and resources are required. However, when you're self-financing, you won't have to seek approval from any investor or institution, and expanding a business will be much faster if you have the means and resources.
2) Greater profitability
When self-financing a business, you don't dilute equity as you don't seek out partners or investors or seek help from financial institutions to cover the cost. Not sharing business ownership with others means that almost all sales and investment profit would return directly to you.
Additionally, since self-financed businesses don't have the luxury of large influxes of capital from investors, they often prioritize profitability from the start. Business owners work diligently to reduce the risk of losing money, develop a solid business plan, and manage expenses efficiently, leading to a sustainable business model.
Using your resources makes you more likely to operate efficiently and keep costs low, leading to a more resourceful business.
3) Skills and experience
When you fund your business, you get to be actively involved in every aspect, from developing your product to dealing with customers. This hands-on experience allows you to gain insights and learn skills that will be beneficial throughout your journey as an entrepreneur.
There’s also an aspect of self-discipline tied to this process. When your money is at stake, you become acutely aware of the risks involved, increasing your sense of responsibility and fostering discipline. It makes you more cautious when making decisions as you carefully consider each one's consequences.
It also encourages creativity and innovation.
The most common disadvantages of self-financing your business are:
1) Risk of bankruptcy and personal debt
Self-financing involves supporting your business with continuous funding until it becomes self-sufficient. This can take a long time and lead to financial constraints. Often, business owners have to make hard lifestyle choices to be able to run their businesses and meet their goals.
Similarly, personal funds have a limit, and if the business is too slow to grow, it only runs the risk of failure, whereas business owners might be at risk of bankruptcy. This might lead you to look into other sources of acquiring money, such as quick access to funds with personal loans with short repayment periods, or using credit cards or lines of credit, accumulating debt.
This is why it's often unavoidable to opt for loan options that offer flexible repayment terms so the business owner can develop a more suitable repayment plan. One example is title loans; you can learn more about them through Title Loans 101.
2) Insufficient resources
When self-financing a business, your funds might not be enough, which can lead to limited resources and hinder the growth of your business.
Limited funds can stop you from taking advantage of particular opportunities or scaling up your business. For example, since personal funds cover production costs, you might be unable to fulfill an order that’s too big, missing out on profits.
That is why self-financed businesses often experience slower growth than companies with access to significant investments.
3) You will be the only one at risk
Self-financing your business means that you will be the only one at risk. If the venture fails, you will have to deal with all of the consequences alone, for example, paying the rent, compensating employees, and paying any legal fees involved in the closure.
This might cause you to lose a substantial portion of your savings and assets, leading to financial instability. Additionally, if the business owner has taken out any loans by offering collateral, their assets are even more vulnerable.
Bootstrapping your startup can be a good option for first-time business owners without access to large capital. It comes with both advantages and disadvantages.
Self-financing means that you will have greater autonomy over all business decisions and won't have to spend time looking for approval from investors or partners. You will also have more freedom to upscale your business as desired, and all profit will go to you.
However, some common risks are the increased risk of accumulating debt or bankruptcy, limited resources hindering business growth, and being the only one at risk in case the business fails.