Self-Financing Your Business. It’s up to You

Finding a way to finance their business is one of the biggest challenges for an entrepreneur. Obviously, without money, you won’t be able to execute your business plan and start your company. The media is full of stories of entrepreneurs getting funded through venture capital, angel financing, or other external sources. The popularity of these stories and television shows like Shark Tank has led people to focus on this type of funding.

Unfortunately, relying on venture or angel funding will lead to a failed strategy – for most.

The Myth of Venture and Angel Financing

Perhaps calling venture funding and angel financing a myth may be harsh, but it’s accurate. It’s true that some people do get this type of financing. But the vast majority don’t get this funding. I’d say that getting venture and angel financing is nearly impossible. Most venture capitalists openly admit that they look at many – perhaps hundreds – of ideas before finding one that interests them. The odds are stacked against you. Most business concepts get disqualified because:

  • They are not well developed
  • They are not tested
  • They fall outside the area of interest of the VC or Angel
  • They don’t have the right team in place
  • They don’t have the right market potential
  • And many other reasons…

If you have a great idea and your only way to finance it is through venture capital – you might as well give up now. Your chances are slim. You will be much better off if you have a plan to finance the business by yourself, at least initially. Once your business proves that it works, getting outside funding is much easier.

Realistic Sources of Financing

Most entrepreneurs are strong and self-reliant individuals. This trait is useful for entrepreneurs because, when it comes to funding, you often have to rely on yourself. Let’s go through some realistic sources of financing.

Your own savings

Most entrepreneurs finance their businesses through their own savings. I actually funded my business by saving for it – for about six years. If you know that entrepreneurship is in your future, start saving money right now. Save as much as you can – because you will need it.

Your Retirement Savings and Your Home

Some people finance their companies by cashing their retirement savings (e.g., 401K, IRA, pension plans) or by taking a loan against their home. The press is full of folks who used this strategy to successfully build a company. However, the media does not usually mention what happened to the entrepreneurs who risked their home and retirement – and failed. In my opinion, this source of financing is a bad idea. I would not do it.

Friends and Family

I would also be very careful about taking investment money from friends and family. Nothing can sour a family or friendship sooner than a disagreement over money. However, this type of financing is viable and is used often.

If you choose to get money from family members, you should:

  • Not over-promise results
  • Take investments only from folks who can afford it
  • Make it formal. Draw proper legal documents

Lastly, remember that even “silent” partners can become very vocal when their money is at stake.

Government Financing

I am a big fan of the Small Business Administration’s microloan program. This program is ideal for entrepreneurs who are just starting up. It can give you up to $50,000 in financing. However, the financing will come as a loan which you will have to pay back. Getting a microloan is much easier than getting a conventional loan. Most microloan intermediaries also provide financing counseling, which can be ideal for new entrepreneurs. Here is a list of providers. Or, you can work with Accion, one of the largest intermediaries.

Alternative Financing

Some businesses, such as consultancies, don’t need a lot of money to start. Instead, they need money to pay for operations. This need can present a challenge because most commercial clients pay their invoices in 30 to 60 days. In that case, one alternative is to use invoice financing. This solution accelerates the revenues from slow-paying invoices, providing you with operating capital. Invoice financing is one of the services that we provide at Commercial Capital LLC. You can learn more by watching this video.

If you need business equipment, one option is to use leasing. Companies often have programs in which the equipment is the collateral and the lessee pays a monthly fee to use it. Many such programs are structured so that you can buy the equipment at a low price after the lease. You can research companies at the Equipment Leasing and Finance Association.