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Your business is your baby. It needs love and attention to grow and become the best it can be. And, like children, it requires money too. You need to pay for stock, bills, marketing and staff. The list goes on. Many small businesses take on debt or give up equity in the business to raise the finance they need, but there is a third option. You could pay for everything yourself. But is that a good idea? What are the advantages? What are the risks? Let’s take a look.Ìý

The advantages of self-funding your business

Many small business owners need to invest their own money early on to build momentum and demonstrate their seriousness to future lenders and investors. Taking on this financial burden long-term is a significant decision, but self-funding – whether through personal savings, inheritance, or wages – offers advantages that businesses relying on debt or giving up ownership may not have.Ìý

Retaining control

Self-funding allows you to maintain full control over your business. You won’t have to worry about external investors influencing your decisions or altering your vision. Instead, you have complete freedom.

No debt repayments

Using your own money means you won't incur debt. With no monthly loan repayments or interest rates to worry about, you can enjoy better cash flow and potentially reduce financial stress.

A stronger commitment

Investing your own money can enhance your commitment to the business. With your finances on the line, you may work harder and make strategic decisions that align with your financial goals.

Less adminÌý

Self-funding eliminates the time-consuming and complex process of loan applications or crafting pitches to attract investors, allowing you to focus on your business.

Potential for greater profits

Since you won’t need to share profits with investors or pay interest on borrowing, self-funding can lead to higher personal earnings as your business grows. In short, you keep more of what you make.

The risks of using personal funds

Using personal funds to bootstrap a business has real advantages, but there are also considerable risks to consider. Your personal finances must cover many aspects of life, so you don’t want to deplete your savings entirely. Here are some risks of self-funding your business:

Financial loss

Using personal savings means you could face significant financial loss if your business fails. This can directly impact your personal security.

Limited resources and options

Depending on how much money you can spare, self-funding may hinder your ability to grow and scale the business.Ìý

More pressure

When your own money is on the line, the pressure to succeed is intense. This stress can affect your decision-making, your ability to process information and even your overall well-being.

Fewer contacts

Investment opportunities through equity finance are not just about money. Investors can also introduce you to their contacts, help with business decisions and offer strategic guidance. You may miss out on this if you go it alone.

No safety net

Using savings to fund your business depletes your personal financial safety net. This can make it harder to cover personal expenses or emergencies when needed.

Assessing if you’re financially ready

In addition to the pros and cons detailed above, you also need to assess whether you’re ready to take on the commitment of self-funding. These six steps can help you understand whether you’re financially capable of funding your own business:

Step 1: Evaluate your personal financesÌý

Review your income, savings and expenses to calculate what you have available. This helps you understand your financial position.

Step 2: BudgetÌý

Create a detailed budget that lists all your personal costs. This helps you see how much you can realistically allocate to the business and identify any shortfalls.

Step 3: Research business costsÌý

It’s important you know how much it costs to start a business. Research how much necessary equipment, inventory, permits and marketing might cost before you dive in.Ìý

Step 4: Assess cash flowÌý

Cash flow is one of the biggest issues for a business. You need to ensure you can cover day-to-day operations until your business turns a profit.

Step 5: Emergency funds

Consider setting aside an emergency fund. You may need to use this fund for emergencies in both your personal and business life. Aim to save at least six months’ worth of expenses.

Step 6: Discuss your intentionsÌý

Self-funding a business is a big financial decision. Talk to friends and family first. You may also wish to discuss your plans with a financial advisor for tailored advice.

Alternatives to self-funding

Self-funding a business isn’t for everyone. For some, the benefits outweigh the risks while for others, it’s tricky to make the numbers add up. Luckily, there are plenty of alternative ways to fund a startup.Ìý

Basically, there are two types of financing: debt financing and equity financing.

Equity financing allows you to receive investment in exchange for ownership stakes in your business. Common examples include angel investors, crowdfunding and venture capital. These options can help you avoid debt repayments, but by giving up equity, you may lose some control of your operation. The investor is also likely to take a share of any profits.

Debt financing, on the other hand, is a way of raising money by taking on debt. This might include a business loan, credit card, a line of credit, a government-backed Start Up Loan, peer-to-peer (P2P) lending, asset finance (which can pay for equipment) or invoice finance (which acts as a cash advance on unpaid invoices).

You can also explore business grants. Unlike the other options mentioned, you don’t need to repay grants. However, they can be difficult to obtain due to the competitive nature of grant applications. But if you have a solid business plan, they are worth considering.