If you are thinking about self funding your new start-up business then you must have exceptional cash flow management. There are 3 possible options for self funding your new business venture…
Self funding with your life savings
The first thing you should consider when thinking about self funding is your own savings. At Empire Financial Services S.L., wherever possible, we advocate this approach, for the following reasons. You are answerable to none. There is no interference from an investor, business angel or venture capitalist. If your business fails, then nobody will come knocking on your doors demanding your hide or some other critical asset, such as your house. The bad thing is that it if things do go pear shaped, it is your money that goes down toilet. If you’re not willing to risk your own money, then you shouldn’t be willing to risk anyone else’s either.
If you manage to self fund your business, after less than a year, your income should be sufficient to fund your business. In an ideal world we would all finance our own start-up business, but not many people can self fund.
Borrow from Friends and Family
Another type of self funding is where you get loans from your family and friends in exchange for equity in the company. That is, by investing an amount equal to a specific portion of the company, they can expect profit sharing and a corresponding percentage of the sale value of the company after a period of time. This works well for some, but here’s a little bit of advice: NEVER mix friends and family with your business matters. If you do, then you will pay a terrible price. What tends to go wrong with the business, will spill over into your personal life and vice-versa. It is possible that you may drain their nest egg or reserves and unintentionally jeopardise their security. Under such circumstances, the result has a tendency to destroy relationships, irrespective of how close that person is to you.
Re-Mortgage or Second Mortgage
In today’s market, raising finance via bank loans are next to impossible to get if you don’t have good security and an equally good track record of business success. These days most of the banks will provide money on a secured basis, because their underwriters are now practicing”Risk Mitigation”. As a general rule of thumb, banks will either look for a personal guarantee (PG) or they will look for some form of security, such as a bricks and mortar. Many entrepreneurs use the equity in their homes to raise finance for their business after being turned down for a bank loan. While this makes more sense than building a business on credit, the financial risks are no less risky. You must pay this money back through increased mortgage payments whether your business succeeds or not. However, this mechanism is a good source of low interest money to get you started in your business and the interest may be tax deductible (check with your accountant to make sure).