Self-financing your business offers a better rate of return with no interest or restrictive payment terms to meet
Investing your own money into your business is an option taken by many entrepreneurs. There are a number of ways to invest – from savings and remortgages to selling valuable assets.
Savings are the easiest and least-expensive way of self-financing your business. Having the cash in a lump sum can be useful when your business is in its earliest stages, and can make it easier to meet outgoings. Savings are a safer form of debt than many others, such as commercial loans, because you’re not automatically committed to a fixed amount of capital, unlike a bank loan or private equity investment.
Remortgaging involves paying off one mortgage with a new mortgage that typically provides better repayment terms and greater access to equity. The same property is used as security. Remortgaging can provide extra finance to kick-start your business but it can be difficult to raise a significant amount of money remortgaging unless a large proportion of your original mortgage has already been paid off.
Borrowing from friends and family, or close business acquaintances is a popular way to finance your business. However, you should treat the transaction as professionally as possible and draw up the necessary contractual terms, even if there are unorthodox repayment terms or the investment is a gift that doesn’t require repaying. Read our guide to raising finance from friends and family
for more information.
Credit card borrowing
Business credit cards offer access to short and medium time finance although the repayment terms can be very harsh if minimum monthly payments are not paid. They are not ideal for longer-term borrowing where you’re not sure when you’ll be able to fully pay off the debt. Look around for good business credit card deals, such as 0% for a year. Don’t be afraid to switch lenders if your current institution is providing a poor deal.
Selling assets to raise capital can yield a varied result depending on the value of and demand for your sellable possessions. If you selling all your valuable possessions in one go then you’ll have a lump sum ready to invest, similar to if you had savings. If you’re selling items as and when you need the cash, it’s more risky as you may need to heavily drop the price should an emergency need for cash arise.
Advantages of self-financing
In terms of value, self-financing tends to provide a better rate of return than most other forms of financing including bank loans. With no interest to pay and no restrictive repayment terms (not applicable to personal bank loans and credit card borrowing), self-financing is a less risky and less expensive form of funding your business. Investors and banks aim to maximise their own return which reduces the value of the investments to you. You’ll also have more control of your company, as you’ll not have to transfer an ownership stake as is the case with equity finance.
Disadvantages of self-financing
There’s a significant emotional involvement when self-financing which can sometimes effect business judgement, particularly if you’re using savings that have taken you years to build up. Borrowing from friends and family can also stress relationships. If you’re remortgaging or taking out a secured personal loan, you could lose your property if the business fails and you’re unable to repay the loan.
Matching method to need
Self-financing offers a range of options that will suit different businesses depending on why finance is needed. If you’ve got an order that requires stock you can’t afford, credit card borrowing may be a viable option because you’ll be able to pay off the debt quickly once invoices have been paid. Borrowing on credit cards to finance a new office move may not be such a good idea as you’re unlikely to see a direct return. Matching the method to the need is essential to get the most out of your investment and reduce the effects of your debt.