April 29, 2008
Unless you’re in an entirely new field, most of what you need to start a business sits in your house.
Because startup costs are usually low, most people bootstrap, or self-finance, their ventures using savings, credit cards, or home equity loans. Starting with a bigger budget may not make a startup more successful. In fact, it may do just the opposite.
Being heavily leveraged upfront can cause so much emotional strain the business owner can’t get the work done to make the payments.
Starting a business is similar to raising a child (or an animal if you don’t have kids). It has to grow—through your continual investment—before it can stand on its own. It can be a slow, sometimes never ending process. In short, it’s a lot of work!
Here are a few rules of thumb to help you finance your business without sending your financial life into a tailspin.
1. Be ready to fund your business with money on hand. If you have to, use credit cards. Just don’t make it a habit. When I first started, it was too easy to buy something “for the business”. I was using my business as an excuse to buy stuff I probably didn’t need.
Looking for extra cash in your paycheck without asking for a raise? Redue your taxes. Most people withhold way too much in taxes. If you’re getting several thousands dollars refunded each year, that’s several thousands dollars you could of had throughout the year.
The money you spend on business expenses will reduce your taxable income. Why not spend the money when you need it?
2. Don’t borrow unless you absolutely must. If you get a big project and need new software, whip out the credit card. The job should cover the expense. And if you do borrow, work the payment into your overall budget. It’s easy to “cover our eyes” on credit card debt and just make the minimum payments.
Especially try to avoid borrowing from friends and family if you don’t know how you’re going to pay them back. You certainly don’t want to start off with sour family relationships.
3. Don’t quit your job until you can cover your living expenses, or at least the majority of your expenses. Can’t cover your mortgage or rent? Don’t quit. Remember that some of your expenses will go down if you’re working from home (think vehicle gas).
By “bootstrapping” your business, you’ll only grow as much as you can produce. But, it’s a far safer and more reliable way to get started. By using existing money and self funding with profits, you’ll grow a healthly and very profitable business.