Funding Your Business: Self-financing vs Finding Investors

By Rajiv Sighamony. in Startups. Updated on November 19, 2017.

One of the main problems in starting up your own business is in how to start off and then stay afloat financially. There are essentially two ways to do this: fund the business yourself or get investors to fund it for you.

Many startup entrepreneurs believe that it is wise to get investors who will take interest in your project, rather than push your own funds into it. Venture capitalist funding will lead to tax savings, and more importantly, it exerts less pressure on entrepreneurs. However, it takes a lot of effort to get someone else to trust in your business skills and bet on you with their money.

Recommended Reading: 7 Successful Entrepreneurs Who Began As Freelancers

Plans And Pressure

For an investor to part with their own hard-earned money, you have to know your plans inside out and convince them that they will get returns even when that is out of your control. If one resorts to self-funding, they are pushing their own money into a startup project, which could lead to a pressure cooker situation, diverting their focus from doing a good job with the business.

Entrepreneurs, like the rest of us, perform best when their mind is clear, so they can make business decisions clearly. Self financing might hamper optimum functioning of entrepreneurs, although there are people who thrive under pressure. Let’s look at some of the factors you have to consider before determining the best route to take when it comes to financing your new business venture.

Going with Investor Funding

For what it’s worth, it is never easy to get investors to take risk with your startup, even though sometimes it could be the only choice you have to get your business off the ground. Investors are never willing to part with their money. And they will ask a lot of questions, and investigate your claims and facts before unlocking their reserves.

However, if you have a good idea with great potential and can convince them that they should invest on you than on another business opportunity, there’s no reason why they would turn you away. It all boils down to your business pitch.

Pitching the idea to a potential investor involves a long and tedious preparation process. You will need a business plan and a perfect outline on how you will eventually run your business, break even and eventually profit in order to get investor funding.

Once a startup is launched, a lot of work goes into carrying out the duties as the decision-maker. Having one less thing to worry about – finances being no less important than the other aspects of a business – will help entrepreneurs be more organized and mindful of their business responsibilities.

There is also the push from the expectations of your stakeholders, and always having to live up to those expectations. It helps power the thirst for success and for growth.

Going with self-Financing

Self-financing on the other hand can make you laidback, and at times allows you to stay in a stagnant position where you expect things to happen on its own. You don’t have to answer to anyone. You are your own boss, and therefore are more likely to take it easy.

Although, you might be very eager to achieve success, it’s harder to maintain the level of motivation for a longer period of time, unless you are extremely disciplined.

That said, self financing can work for some startup entrepreneurs, if they know how to make it work for their business, and if they have strong backup plans. It also allows them more freedom to make their own choices, without having to go through or answer to their stakeholders.

Ways To Self-Finance

Self-financing can come in many different forms. If you want to embark on a family business, you can partner up with your family members, which is the usual choice to go with because if you can’t trust your family members, who can you trust?

Alternatively, you can find business partners and split the business (and the capital) a certain way that is mutually accepted by all parties. There are also options to get business loans from financial institutions or startup grants by the government.

Current funding trends

The arrival of venture capitalists and other investors in the form of banks and financial institutions have led even those with enough initial funds to seek investors. It is not just because self financing can be risky, but because investor funding can now come without any form of collateral.

All they need from the entrepreneurs is an in-depth look into the background of the fund seeker and of course, the winning business idea.

This kind of funding could be seen in offers by top business management schools, sometimes extended to undergraduates who have yet to break out into the working world. These funds are dispatched because the investors – the schools themselves – have full faith in their academic success, and they believe that with the proper motivation, these ideas can lead to great entrepreneurial success.

The best option

While the best option to go with is still to get an external party to invest in your business idea, getting an investor to say yes to your idea is about as hard as getting your busniess off the ground. The determining factor lies on the entrepreneurs themselves.

Can you find investors who share the same vision as yours? Can you convince your investors to appreciate the potential that is in your idea? Or would you prefer to have the freedom to experiment with your company direction and succeed, as well as fail, on your own dime?