Sources of Capital: Personal
In continuation of our look at different sources of capital, we will focus on the most immediate and easy-to-obtain source (if you have it, that is) of working capital for your business: your own personal funds.
Whether you have a savings account to dip into or you borrow from friends or family, coming up with your own sources of capital, or “bootstrapping”, offers a variety of benefits. In most cases, it will offer you greater flexibility in how you run your business since you won’t have an investor group to report to. Also, by not going to outside investors, you are able to maintain 100% ownership in your company which will pay off when your business becomes profitable. If you seek venture capital for your business in the early, high-risk stage of your company, you are going to have very little leverage in negotiations, which will likely require you to give up a disproportionate ownership percentage for the capital contributed.
Another consequence of bootstrapping is that it forces you to be more committed to the success of your business and to run the business as efficiently as possible. Since less cash is available, you will be less likely to make risky investments that may not pay off, such as overspending on advertising when your product is in pre-production. Having to scrap for every dollar will give you prime motivation to avoid unnecessary expenditures.
Of course there is always a potential downside to shouldering 100% of the risk of your company’s success and staking your life’s savings in it. It’s a classic risk/reward scenario, and the question is how much risk you can stomach.
About the Author
Tim Peters is a consultant with Morrison, working primarily in our Business & Accounting Advisory practice. To get in touch with Tim, please find contact information for Morrison here.
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