Starting a new business can be an exciting adventure. Finding the location, formulating a business plan, and hanging the “Open” sign may fulfill one of your long-cherished dreams. However, securing capital to begin operations can be challenging. There are a number of potential sources of financing to consider. Some entrepreneurs are able to secure bank loans or venture capital, while others may qualify for a guaranteed loan through the Small Business Administration (SBA). Other prospective business owners turn to family members or friends for financial support.
Typically, personal funds are the primary source of start-up capital, and many successful entrepreneurs have used their own financing to get started. Although some prospective entrepreneurs prefer to assume the risk rather than share the equity by financing their start-ups out of their own pockets, others may be unable to raise sufficient capital from outside sources.
Here are some key reasons why business owners may choose to personally finance their own ventures:
Control. Entrepreneurs are often willing to assume greater risk in order to retain greater control over their businesses. A dilution in ownership could result in a less focused business. Founders who wish to retain control but require start-up capital from outside sources may want to consider including a “buy-back” clause in the financing agreement.
Speed and Simplicity. Some small businesses may be launched quickly and relatively easily with personal funds. Entrepreneurs usually have a solid understanding of their business needs and are able to project the initial costs of doing business. Consequently, they may prefer to avoid the time and intrusion of outside scrutiny.
Modest Needs. Many owners may be able to begin operations with only amodest cash infusion. For instance, some of the most common types of businesses — franchises, start-ups, and small family businesses — may not require capital-intensive planning at the outset. In particular, service businesses may tend to have lower initial operating costs and a shorter “burn rate” (i.e., the length of time before achieving a positive cash flow).
Expertise Counts. Most start-up businesses require specialized knowledge or expertisethat enables the owner to personally manage operations. Some of the most popular ventures are construction companies, restaurants, cleaning services, automotive repair shops, beauty salons, computer repair services, and consulting services. In these types of businesses, many of the start-up costs have already been “paid in the trenches” before the company is founded.
Owning your own company may be an attainable goal. If you are contemplating starting a business, contact local banks, business organizations, trained professionals, and even family members and friends for advice and support. You never know who may be ready to lend a hand. Remember, a sound financial plan outlining your capital resources and requirements is an important first step on the road to fulfilling your dream.