What you’ll discover:
The Benefits and Drawbacks of Outside Funding
The Benefits and Drawbacks of Spending Your Own Money
There are angel investors, venture capitalists, and other sources of finance for your firm. Some company owners seek these choices, while others choose to go it alone.
Startup entrepreneurs often pursue one of two financing strategies:
Debt financing is the process of borrowing money and repaying it at a set interest rate. If your firm succeeds, you keep the profits and control.
Selling shares or ownership in your firm is referred to as equity funding. You owe less money, but you won’t be the only one benefiting from your success since your investors or co-owners will divide the profits with you.
It is entirely up to you whether you seek other funding or utilize your own funds. Regardless matter the option you select, remember to obtain it in writing using paperwork from our small business center.
Table of Contents
The Benefits and Drawbacks of Outside Funding
Not everyone can get the necessary funds on their own to launch a business. Outside finance allows you to acquire funds for equipment and other beginning expenses more rapidly.
Although startup experts often advise against borrowing more money than necessary, another risk is running out of money before your business idea is strong enough to stand on its own. Your attempts to recruit investors may be hampered if you do not have adequate cash.
Equity financing is exchanging a company’s equity for cash. You raise funds without incurring massive debt, but you also give up some control. Investors anticipate that their profits will ultimately outnumber their investments. Giving them a voice in corporate decisions may be necessary to enlist their assistance. This may include the ability to limit salaries or other perks.
Investors may be granted the following rights:
The process of selecting a board of directors
Being kept up to date on crucial business decisions
Voting on any significant business decision
Equity investors may even vote you out of your own firm or sue you if they do not believe you are giving their rights.
If you bring on equity investors without first forming a corporate structure, they will almost certainly become your general partners. This provides them a voice as well as a portion of the debt. In contrast, joining a company reduces their responsibility while increasing your power.
We provide advice at every step of your company, including which entity to form. If you bring on a partner to assist you secure funding, have all parties sign a partnership agreement.
Before opting to seek outside money, weigh the pros and hazards.
How to Fund Yourself
You may spend your own money in a variety of ways, from not leaving your day job to borrowing money from a bank or depending on credit cards.
When considering utilizing your own money, the word “bootstrapping” is likely to come up. It is the process of establishing a business with little or no outside funding, using whatever resources are available. That may imply not paying yourself while reinvesting profits in the firm, but it also keeps you in charge.
Utilizing your own money does not negate the need of having a good business strategy in place. A business plan allows you to identify your unique demands and how much money is required. It also provides you with credibility when contacting banks or other lenders. You should also ensure that you can convert your concept into a company before getting into debt.
Work with a small group to save money, provide stock options instead of cash, and only recruit those you need. Consider interns as a free or low-cost alternative to full-time employment, particularly if you reside near a college. When taking this method, spell out the terms of the arrangement, including salary, and draft an independent contractor agreement.
Make a list of all the cash you have on hand. Add savings accounts, real estate equity, retirement accounts, automobiles, and any collection that you may trade for cash if necessary. Investments may assist you in obtaining loans. Explore alternatives such as a home equity loan or credit cards. If you choose this option, make it in writing with a promissory note.
Borrowing against 401(k) retirement plans or individual retirement funds are two more options. Consider the possibility of having to pay an early distribution penalty as well as income tax on the amount borrowed from your IRA.
The Benefits and Drawbacks of Spending Your Own Money
Utilizing your own money may need more time to launch your firm, but it enables you to prioritize the development of your product or service. If you do decide to seek outside finance, prospective lenders want to see that you are trustworthy enough to entrust their money to. If you invest initially, they will be more likely to do so.
Yet, there are drawbacks, including your own sacrifices. Before you make these sacrifices, be sure you really want to start a firm. It may include postponing holidays, cutting down on costs, or deferring plans in order to save for your retirement or your children’s education fund.
Borrowing from IRAs and 401(k) plans is also detrimental to your retirement planning. Using credit cards and taking out loans gives you influence over your company’s destiny while placing all of the burden on your shoulders. Creating a corporate corporation might help to secure your personal assets. Read our company formation guidance and, if necessary, contact our incorporation professionals.