Considering Self-Funding Your Startup? 16 Finance Experts Share Essential Considerations

Startup companies face a daunting road to reach long-term stability—one that many don’t successfully navigate. Among the most pressing challenges is finding the cash to fund operations. If an entrepreneur fails to secure loans or outside investors (or prefers not to), they may choose to fund their business out of their own pocket. But is that a wise decision?

Finance experts don’t all agree on the answer to that question. Those who do see value in the self-funding route agree that it’s essential for an entrepreneur to think and plan carefully before investing their own cash in their startup business. Below, 16 experts from Forbes Finance Council share their experience and expertise regarding the issue.

1. ‘Managed’ Debt May Mitigate Some Of The Stress Of Self-Funding

Self-financing your startup has both risks and benefits. The risk? You could lose your personal savings. The benefit? Taking on “managed” debt has its own appeal and removes the stress factor that comes with depleting your savings. Having self-funded in the past, I would suggest that if you have the ability to finance, you should consider taking on managed debt to mitigate any cash flow stressors in the startup phase. – Cynthia Hemingway, Fourlane, Inc.

2. Self-Financing Can Show Your Commitment

Most first-time entrepreneurs are expected to put in their own money. Self-financing is almost taken to be proof of commitment in entrepreneurs. If someone is putting their own money behind their idea, it speaks volumes about their strong belief in their idea and their capabilities to build something out of it. – Farhan Naqvi, iLearningEngines

3. Burdensome Personal Debt Should Be Avoided

To some degree, having “skin in the game” is a plus—it’s appreciated by later co-investors. However, the owner’s leverage should not become burdensome, especially in a low-interest environment. Bringing in equity partners has many benefits and reduces the loan-to-value ratio of a young business, which will also allow you to finance externally with better conditions if it’s needed later on. – Lucia Waldner, CC Trust Group AG

4. You Should Have A Plan For Recouping Your Investment

An entrepreneur should first look at all the funding sources available to them when they are aiming to build their company. After considering the availability, the required security and the terms of these funds, you can then decide whether or not to self-fund the company. If self-funding is the only way forward, plan on taking the invested funds out gradually when the company becomes cash-rich. – Reza Ghazi, GreenFlow Financial

5. Self-Funders Must Keep A Close Eye On Operational Expenses

The biggest expense for most businesses is payroll. If you can self-fund your small business, keep a close eye on operational expenses by signing every check for at least 90 days. You will find many expenses that you are paying can be easily automated with online payments. Streamlining your operations from the outset helps create a healthy business and doesn’t directly impact customers. – Minal Babaria, KB Tax Deviser CPAs


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6. You Need To Look At Your Business From An Outsider’s Perspective

Self-financing should only be done as a last resort. Hopefully, the business idea is strong enough to support the investments of others. Try to look at your business idea from an outsider’s perspective, and build a case for investment in your business from that angle. You are likely passionate about the idea, but build a case based on facts and evidence that support future growth. – Dave Sackett, Visibility Corporation

7. The Use Of Personal Funds Should Be Carefully Planned And Limited

I do believe the reason that so many entrepreneurs self-finance the growth of their companies is that this is often the only source of funding available. The first tip I would offer is to set a budget and limit the amount of funding that will be self-financed. The amount and use of the proceeds should be consistent with the business plan, and there should be a well-thought-out plan to manage the budget and the use of personal funds. – Peter Goldstein, Exchange Listing LLC

8. SBA Funding Is An Often-Overlooked Alternative

Self-financing is the initial path for small-business owners when they’re trying to prove the company’s viability and preserve equity ownership. However, more small-business owners should consider SBA financing to provide critical working capital and other proceeds. Often, traditional bank lending isn’t available, and SBA loans provide solutions without diluting equity ownership—something other alternative financing measures unfortunately require. – Christopher Hurn, Fountainhead Commercial Capital

9. Performance Equity Clawbacks Should Be Part Of Any Outside Funding Deal

This is a question that’s highly personal to each individual. While many entrepreneurs are forced to seek outside capital due to their personal finances, I would add that most entrepreneurs don’t think twice about putting up their own money if they have it. If you are forced to seek outside capital, be sure to give yourself performance equity clawbacks. This will ensure that you maintain a reasonable amount of equity. – Joseph Safina, Safina Asset Management

10. Zero-Interest Business Credit Cards Can Help Protect You

One of the ways to self-fund your business is to apply for business credit cards that offer 0% interest for 12 months or more. You would use your personal credit as leverage to apply for these credit cards, but they will not report to your personal credit report—only to your business credit report. You can then use these cards for expenses or even request a check to use as cash. – Jose Rodriguez, Got Credit?

11. Your Long-Term Goals Are An Important Part Of The Equation

The answer really depends on the owner and their reasons to bootstrap their startup. Normally, equity is more expensive than debt, but bringing in partners and capital can also have huge benefits. As you evaluate your capital needs, look at the long-term goal of the business and, as a founder, what aligns with your goals. If it is to grow and exit, outside funding may be perfect. – Brian Hayes, NOW CFO

12. You Need To Consider The Effect On Your Family

Deciding whether or not to self-finance depends on the cash flow of the small-business owner. If you can afford to self-finance without risking your home, then yes; if self-financing is going to be a burden on you and your family, then no. Get financing if possible. – Lori Moes, DJM Design CAD & Coordination Services Inc.

13. A Sustainable Business Shouldn’t Require Self-Funding

Never dip into your personal funds. If the business can’t sustain itself, then it isn’t a business—it’s a dream that could turn into a nightmare. I’ve met with dozens of small-business owners who drained their life savings trying to save a business that was a pipe dream. Personally funding a dream could quickly turn into a nightmare and bankruptcy. If the business is generating revenue, leverage it. – Anthony Holder, C&H Financial Services, Inc.

14. The Nature Of Your Business Makes A Difference

Starting a business is often too risky for traditional bank financing. I self-funded my own startup and would do it again the same way—however, mine is not a capital-intensive business. Asset financing is often available when machinery and other resalable equipment is involved. So the answer to the self-funding question should consider the nature of each business and whether it is “bankable” or not. – Gil Baumgarten, Segment Wealth Management

15. You Should Place A Promissory Note On File To Repay Yourself

More often than not, new business owners need to dip into their own funds to start their companies. It is very rare for a lending company to offer funds at a good rate to a startup. If this occurs, ensure that you have a promissory note on file to pay yourself these funds when they become available. This allows for the cost to be captured officially by the business and reflected in the financials. – Kelly Shores, GCubed, Inc.

16. Relying On Yourself And/Or Someone You Trust Helps You Maintain Control

If you can afford to self-finance your business, then I would recommend doing so to maintain control over everything. If you can’t, then consider bringing in someone you can trust to get enough money to carry you for as long as possible. Document the deal thoroughly so that there are no misunderstandings. – Chris Tierney, Moore Colson CPAs and Advisors