“The Great Recession” has dominated headlines in recent months, with a wave of professionals choosing to walk away from their jobs to find new careers better suited to their lifestyles and/or interests. Some of them have chosen to create their own businesses or turn what was previously a side hustle into full-time work. But starting a business requires money, and entrepreneurs and small-business owners have to decide the best way(s) to access needed funds.
It may seem easier to open up credit cards or get a personal loan than to round up investors or deal with the specifics of business financing. And while that may be a workable solution for certain situations, there are a few important steps to take to protect your business and personal finances before taking the leap. Below, 15 members of Forbes Finance Council share tips for small-business owners who are considering self-financing their companies.
1. Know Your Market And Capital Needs
It all depends on how much capital a startup owner needs to launch. Manufacturing the next great American product probably needs a lot of seed capital and investors. But starting a small service firm can probably be accomplished with little to no outside capital. Know your market and capital needs, and only get outside financing if absolutely necessary. Why give up the equity? – Todd Sixt, Strait & Sound Wealth Management LLC
2. Evaluate Your Short- And Long-Term Needs
Whether an owner should self-finance depends on how “small” the business is. If a small business has the potential to expand quickly, the owner has to round up investors regardless of how much personal investment is tied into the business. On the other hand, if the business is projected to grow at a modest pace, owners can self-finance as they work to attract potential investors. Evaluating your short- and long-term needs is a must. – Mara Garcia, Phonexa Holdings, LLC
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
3. Consider Your Desired Degree Of Control
It really depends on how much control you want to have over the trajectory of your company. Self-financing can create a financial strain, but it gives you a high degree of autonomy. Bringing in investors also entails engagement, which could erode autonomy over time. – Paul Davis, Strategic Resource Management
4. Separate Your Business And Personal Accounts
I’ve seen small-business owners successfully self-finance their ventures, and even with that approach, I recommend they decouple their personal and business accounts from day one. Using a business credit card and opening a business bank account create a good foundation for keeping finances separate and establishing business credit. – Jenn Flynn, Small Business Bank at Capital One
5. Understand The Potential Credit Impact
Your goal should be about getting results as a small-business owner, but knowing the impact is important. Yes, use credit cards the majority of the time, as that is your best resource for a loan. The impact is that it can affect your personal life when it comes to everything from getting a car to buying a home. For entrepreneurs with big goals, it is an easy “yes,” but long-term small-business owners should consider the potential credit impact. – JD Morris, RHC 21 LLC (a SPE Fund)
6. Ensure You Have Sufficient Liquidity
Until recently, it was easier to advise owners to leverage the purchase of startup costs and even ongoing operations. I think there are two main factors to consider. First, do they have sufficient liquidity to continue business operations if they self-finance? Second, if they choose to borrow in a higher-rate environment, how will debt service be handled, and what will its effect on profitability be? – David Redding, Argent Financial Group
7. Have Credit Cards For Your Business In Case They’re Needed
A major benefit of owning a company is the ability to build business credit. It’s always smart to have credit cards under your business in case of an unexpected expense—particularly because investors may not share your vision and may not want to give you the funds. Remember, most card companies offer 0% APR for the first 12 to 18 months, and if you don’t use the cards, there is no interest. – Antoine Sallis, Rapid Credit Boosters
8. Think About How Fast You Want To Grow
If you aren’t as concerned about building to scale, bootstrapping is the way to go. The “pro” is that you have complete control and don’t give up any equity. The “con” is you will build more slowly and simply won’t have access to the same talent. – Mike Whitmire, FloQast
9. Set Up A Budget For Necessary Costs
Self-financing is a great option for small-business owners who have the financial means to do so. Any entrepreneur considering this strategy should budget for the costs necessary to get their business off the ground, including office space, technology, insurance and more. Budgeting is a great tool that can help small-business owners determine if self-funding is feasible. – Jeff Call, Bennett Thrasher
10. Create A Use Of Funds Schedule
Business owners should self-finance if they have the money. It will be prudent to create a use of funds schedule to ensure self-financing will yield the desired end result without compromising the liquidity of the owner for emergencies. A use of funds schedule with a predetermined return on investment for use of those funds is key. A clear road map will help you determine if self-funding is feasible. – Karla Dennis, Karla Dennis and Associates Inc.
11. Set Clear Milestones
For the majority of business owners, the choice isn’t either self-financing or investors; the question is whether self-financing should be supplemented with outside funds/investors. Often, self-financing increases your chances of getting external financing in the future. Those considering this path should have clear milestones to avoid pouring in self-financed funds with no future plan. – Sameer Gulati, ZenBusiness
12. Use Debt Funding To Develop A Proof Of Concept
Many venture capitalists and tech investors are seeing evaluations slashed, so they are being more cautious about investing in startups. This is why it’s vital to have “skin in the game” and utilize debt funding to develop a proof of concept and gather real sales. This will eventually lead to future capital raises from investors. – Leo Kanell, 7 Figures Funding
13. Consider Future Fundraising Efforts
An entrepreneur who invests personally in their business demonstrates the conviction that encourages other investors to invest when the time comes. By self-financing, they can also time future fundraising efforts to the achievement of critical milestones, which may reduce apparent risk. This allows an entrepreneur to seek outside capital from a position of relative strength, with more favorable and less dilutive financing terms. – Bob Ackerman, AllegisCyber Capital
14. Don’t Overlook Other Options
If self-financing is an option, I would not stop there. I would explore the many available options, which include searching for investors, looking into bank loans for the business, securing a business line of credit and seeking government grants and loans. A proper cash flow can have dramatic effects on small businesses, so try to secure enough cash for your future needs, and do not stop looking. – Dave Sackett, Visibility Corporation
15. Consider Whether You’d Benefit From A Strategic Partner
If you can self-finance your business, it will typically be a better solution than giving up equity to take on investors or utilizing expensive debt. Third-party financing sources should be used over self-financing when self-financing is not an option or when the capital provider can be a strategic partner beyond just providing you with money. – Sean Frank, Cloud Equity Group