Almost all good businesses rely on solid funding. But for some businesses, particularly new start-ups, self-funding is the best (and sometimes the only) option. Self-funding means a business owner uses their own money or assets to fund their business.
Ways to self-fund a business
There are several different ways in which a business owner can self-fund their business. One of the easiest is to use their own personal savings. They may also borrow privately from friends or family, get an unsecured loan, remortgage their property or apply for a business loan.
What are the advantages of self-funding?
One of the main advantages of self-funding a business is that it affords you complete control without the involvement of outside investors. This means you have total independence on business decisions, you can move quickly without recourse to investors and retain full control and equity. Self-funding can also lead to better financial outcomes and discourage excessive spending.
For many new start-up businesses, self-funding is the only viable option. Recent figures showed that in the UK, a new company is formed every minute and a large proportion of these will be self-funded. Initial self-funding can bolster your application should you request a business loan in the future.
What are the disadvantages of self-funding?
Using your own money to fund your business can, of course, be a huge risk and can impact on your personal life and family life. It also means your financial future is inextricably linked to the fortunes of the business.
Are there other ways to raise money?
One funding method – and one that logically follows on from self-funding – involves the use of a director guarantee. A director guarantee, sometimes called a personal guarantee, is a legal promise that credit issued to your business will be repaid. If the business fails to pay, then the named director takes on personal liability for that loan. This kind of personal guarantee provides an extra level of protection to credit providers. Such a guarantee is common in cases where a company director has already made a substantial investment in their company and this can help them secure further funding.
A personal guarantee will increase the value of the funding your business can raise and this can, in turn, be used to support its growth. It also makes your business more attractive to lenders. It does still involve your own personal finances being placed at risk. Prior to signing a guarantee, a director must seek independent legal advice such as Parachute Law director guarantee advice.
In conclusion, there are many attractive advantages to self-funding your business, although it is particularly common for new businesses just getting off the ground. However, self-funding can take a toll on your own personal finances. One way to raise money for your business is to apply for a loan and offer a personal guarantee from a director. This still involves a great degree of personal liability but increases your chances of securing funding.