One of the most common ways that a new business is started his by a direct investment from the owner. This is commonly known as bootstrapping especially if the entrepreneur is working on a very small budget in order to get the business up and running. While this may be a struggle in the beginning stages of the business, the benefits for bootstrapping or self funding a business are tremendous.
Foremost, the owners able to start the business completely with their own capital and they are going to be able to retain a 100% ownership interest as the business grows. If the owner is able to bring the business to profitability within a two-year period than they are going to be an excellent candidate for a business loan away working capital line of credit for expansion purposes. This eliminates the need for a private investor which would dilute the ownership interest of the business substantially.
Most banks and lenders are very receptive to providing capital to companies that have been in profitable operation for a two-year period. As we discussed throughout this website, there are a number of different loans and start fund financing available for start up businesses, but they do come at a price and there these are only available for specific industries. For companies that require a substantial amount of working capital, most banks and lenders are not willing to provide this money and that it is for something like a professional practice including doctors, lawyers, accountants, or other individuals that a hold professional license to practice.
One of the other benefits to using your own capital start a business is that when it does come time to raise capital – even if you need funding from a private investor – the terms which will receive the funding will be substantially better than that of when you’re startup business. Companies that are operational in profitable already have a substantial amount of value built into the company – and as such, they can negotiate a much lower ownership interest in the business among a private funding source. Most importantly, this will allow the entrepreneur to obtain substantial control over their company even in the event where things do not go as planned and the private funding source need some additional capital. This is going to be one of the key things that we discuss on a continuous basis throughout this website at his as it is a topic that we are frequently asked about on an ongoing basis.
Bootstrapping a business or using owner provided funds for company also allows these companies to grow at a much quicker pace given that less time is allocated towards having the source capital. Smartly, many technology businesses rely significantly on the talents of their owners and related companies are able to start their businesses for a very low cost. As such, if your business does not require substantial amount of startup capital and it may be in your best interest to use your own funds in order to get things up and going before you seek outside capital.
One of the ways that entrepreneurs will frequently fund their business with is through the use of credit cards. This is an expensive option for most entrepreneurs given that most credit cards are unsecured and have an annualized interest rate ranging anywhere from 10% all the way to nearly 30%. As such, unless the entrepreneur is able to generate substantial amounts of revenue from the usage of buying assets via a credit card and is typically in the best interest to you savings or other types of capital in order to fund business operations. In some cases, retirement phone funds can be used for this establishment of a new business. However, there are a significant number of considerations that need to be put in place if the individual is going to use retirement funds from a 401(k) or individual retirement account. This is primarily due to the fact that there are tax consequences with using funds from these accounts. As such, if an entrepreneur does intend to use funds from a retirement account and they absolutely need to speak with a certified public accountant in order to ensure that they are remaining within the letter of the law as it relates to the removal of these funds. Your account when were related professional may need to establish a new account or file appropriate paperwork in order to showcase the fact that the money being used from a retirement account is being used for a qualified purpose. As always, if you intend to start a new business then you should always consult with a certified public accountant, lawyer, and related professionals before engaging in any activity as they do have varying tax consequences.
In conclusion, bootstrapping a new company can be when a rewarding experience or sport newer given that they did not need any outside capital in order to bring the business to profitability. It also provides a significant advantage as it relates to raising capital down the road given that the terms that are going to be offered are going to be much better than when the business was just a concept or start up.