Self-financing: What Can Be The Potential Sources of Capital To Finance Your Business?

The roadblock of arranging capital to finance the business can be removed if financing options are weighed carefully.


Rohit wants to start his own restaurant business. He has some great ideas, and he is sure that if he can implement them, his business will have a great take-off. But when he tries to implement his ideas, the first roadblock he faces is the capital to finance his business. And it’s not just the story of Rohit, but many first-time entrepreneurs who struggle to finance their business. In this article, we will share ideas on how you can plan for self-financing your business. 

Bootstrapping your business

One way to start your business is bootstrapping. Many first-time and small business owners rely on bootstrapping before going for funding. Bootstrapping in business means investing your personal resources and funds to kick off your business with no outside money. If you are launching your business without the funds from venture capitalists or angel investors, you are bootstrapping your business. Thus, bootstrapping means you are the only one investing money and ploughing the money earned from customers back into the business. 

What bootstrapping means

The mindsets of bootstrappers are completely different from those run by the management of venture capitalists. Venture capitalists invest a large sum of money, and so they look for fast and high returns. On the other hand, bootstrappers grow and build their businesses slowly and steadily. They have the guts and the passions and are usually long-term players.

Bootstrapping also requires a lot of planning, learn to negotiate well or barter when they don’t have too much cash, and learn to hustle.

Some of the benefits of self-financing your business:

  1. It’s quick. You don’t need to depend on approval.

  2. There is no paperwork.

  3. It makes you frugal, and you try to do the best with whatever you have. 

  4. Involves no costly interests. 

  5. Once you have invested in your business, you have enough to show to the government or the venture capitalist in the later stage if you need to raise a fund or go for a loan. 

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Many first-time and small business owners rely on bootstrapping before going for funding.

How to start with self-financing

Find seed money

The best way to start bootstrapping your business, start with your personal savings or ask for funding from friends and family. This is known as seed money. Seed money is also known as startup stake. If you have a day job, you can start it as a side business when you can continue to work in your day job and use a portion of your salary to build your business. If you have a shoestring budget, seed money can help the business to take off. 

Launch a minimal viable product or service quickly

Launch your business as soon as you have a minimal viable product. Remember, being fast is better than perfect because the faster you can launch, the quicker you can move to the next step. 

Start looking for assets

Do a thorough scan of your assets. Your assets could be equity in real estate, savings account, retirement accounts, recreational equipment, collections, etc. You can either use them as collateral for a loan or sell a portion of them for cash. If you have stocks and equities, you can use them for low-interest loans. However, the pitfall of this is if there is a market fall, you may need to sell some of your stocks or supply more stocks to shore up the collaterals. Also, you need to check your personal line of credit. 

Business credit cards

The use of business credit cards has become popular over the last few years. If you don’t require a lot of money to start your business, you can use your business credit card for payment. Remember to pay the credit card bill on time to avoid debts or extra interest that can be charged as a penalty. 

Savings

If you have made enough savings, this should be the first option for self-financing your business. However, don’t put yourself in trouble by using up all of your savings. It is advisable to leave your money in a savings account for future emergencies and use it only when absolutely needed. 

Bank loan

Many banks offer loans to small businesses. You can check this option if you need a small amount of loan to plan for self-financing your business. 

Retirement funds

You can borrow against your retirement funds if you have retired from your job already. However, don’t consume the entire amount and take only a small portion. Save the rest for your future; it will help you survive even if your business doesn’t work out.

Home equity

If you are looking at ways to liquidate your assets, your home is the best place to start with. You can use it as collateral for self-financing your business. If you have already paid off a portion of your mortgage, then you can get a home equity loan against it. You can either borrow a lump sum loan amount or get an extension on your credit line based on the equity on your home. The home loan usually has a low-interest rate and is tax-deductible up to a certain amount. However, be sure to repay your loan, or you can lose your house. 

Know your personal balance sheet

When you are self-financing, it is important to know your personal balance sheet well. Subtract your liabilities from your assets to understand your net worth. Take stock of your real estate properties, savings, cash, investments, vehicles, etc., and subtract your liabilities like credit card bills, debts, home mortgages, monthly bills, etc. Have a clear picture of your funds before you invest them in your business. 

Salary from an existing job

If you’re starting your business as a side hustle along with your day job, then you can source a portion of your salary to invest in your business. 

Use customer funds

Many small businesses rely on customer funds to invest in their business. You need to close sales quickly or opt for pre-ordering your products and pump back the money in the business. In this financing model, business owners often find slow growth because they need to meet the operational expenses before thinking about revenues.

What self-financing is NOT

  1. Self-financing doesn’t mean you need to give up a huge portion of your equity to borrow money. 

2. Self-financing doesn’t mean you need to go out and start looking for an investor.

3. Although many small businesses rely on credit card loans, they know that it is a short-term fix. It works well when you need to buy equipment or a tool. 

Examples of some popular brands that started with bootstrapping

Apple

The bootstrapping story of Apple is an inspiring one. In 1976, Steve Jobs and Steve Wozniak, founded their company that turned into a multibillion company years later. The company started not in Silicon Valley but in a humble way in the bedroom of Jobs’ parent’s house in the suburb area and later moved to a garage when they needed more space. The rest, as we all know, is history. 

GrabOn

Started in 2013, GrabOn is one of the successful bootstrapped startups in India. The company offers offline coupons, promo codes, vouchers, and gift cards. 

MailChimp

If you have ever used an email newsletter, you have probably come across MailChimp. The company, which was once bootstrapped, now earns millions of dollars in revenue. 

Zoho

Zoho is an old player in the CRM place. It was launched in 1996 when there weren’t many software companies in India. Since it bootstrapped, it took time to see some growth, but the growth has been tremendous for the last few years. 

4 tips for building a strong business while bootstrapping

Focus on building a strong product

There is no alternative to a strong product. When you are on a shoestring budget, you cannot afford to spend much on fancy marketing. Instead, focus on building a strong product or offer a solution that your customers are looking for. When you do that, you build a loyal customer base who then become your brand ambassadors. 

Concentrate on your customers

When you are bootstrapping, you know you have limited funds. Instead of thinking about ways to raise funds, your entire focus should be on developing a strong customer-oriented solution. Remember, your funds will come only when your customers like your product.

Be frugal

When you have a limited fund, you ought to focus on those limited funds you have in hand and try to do the best out of it. In other words, you build yourself as a frugal entrepreneur that will help you to sustain in the long run. 

Find innovative ways to get noticed

When you bootstrap, you cannot fancy over marketing. While you use most of your available funds to build an outstanding product, you also need to get some visibility. While TV advertisements or costly marketing campaigns are out of your budget, you need to look for innovative ways to draw people’s attention. For example, working with freelance content marketers or digital marketers can help you get some visibility over the internet. Participating in contests and social events are other ways to get noticed. Cracking a partnership with other startups or micro-influencers is also a great way to generate some buzz without spending a bomb. 

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There is no alternative to a strong product. When you are on a shoestring budget, you cannot afford to spend much on fancy marketing.

Other funding options to explore 

Crowdfunding

Crowdfunding is slowly becoming a popular way to garner funds for the business. An entrepreneur puts up the details of his/her business on a crowdfunding platform. Details include business goals, how much funding is needed, and the plan to make a profit. Anyone can contribute to a crowdfunding platform for the business they believe in. Crowdfunding also helps generate awareness about the business, which is a positive side of using crowdfunding. 

Government loans

The Government of India has launched various loan schemes for small and medium businesses. Some of these are the MUDRA loan scheme under Pradhan Mantri Mudra Yojana, Start-up India, Make In India, etc. You can benefit from these loan schemes to give a kick start to your business. 

Getting an angel investor

Angel investors are rich individuals or ex-company executives who invest directly in small businesses. While institutional capitalists prefer larger investments, angel investors finance early-stage startups. Along with the capital, they also bring rich technical knowledge and years of experience. In return for the money invested, the angel investors expect the right to supervise the company’s management practices.

Business incubators

Business incubators help new startups at different stages of development. For example, a business incubator can let the new business use its lab for developing new products. An incubation phase usually lasts for two years, and once the product is ready, the business leaves the incubator’s premise and goes for scale-up. 

Venture capital

If you are into a technology-driven business with high growth potential, venture capital can be considered a great option for funding. Know that venture capitalists are keen to fund businesses in information technology, biotechnology, and communications. VCs work by taking an equity position in your company and help you to be in a better position to take risks. If you are okay with giving out a portion of your ownership or equity to a VC, you may try raising funds through a VC. Also, know that VCs expect a healthy return on their investment, so look for investors who have knowledge and experience about your domain of business. 

The takeaway

Whether you want to go for bootstrapping or raise funds for your startup, there are several financing options for businesses. If you are keen on bootstrapping, each financing option has its own benefits and pitfalls. Moreover, it is not necessary that one financing can work for all. So, weigh each option carefully and make an informed decision.

Chayanika Sen
Chayanika Sen
Over a decade of experience in Corporate Communication Chayanika writes on Human Resources, Recruitment, Marketing, Employer Branding and Thought Leadership.

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