The safest and surest way of start-up financing is through personal finance. This is the most widely used form of equity financing.
Personal financing for a business
The safest and surest way of start-up financing is through personal finance. This is the most widely used form of equity financing. It often takes away the delay and uncertainties about if and when a business will be launched because it removes dependence on third parties. It brings decisions that give impetus to the business under the control of the entrepreneur himself. Contrary to popular belief, the primary responsibility for financing a business lies squarely with the entrepreneur that is proposing the business. Personal finance takes several forms that include: leveraging of personal resources, personal fund-raising, and personal savings.
Leveraging personal resources
The first place to look for capital is within yourself. Capital takes different forms that include:
- Your information. Possession of information of a certain nature is a strategic resource that is often under-valued. Information asymmetry about business opportunities creates certain knowledge that can put an individual in a strategically advantageous position to seize a business opportunity or to secure the co-operation of others to do so with them. It is important for individuals to be aware of the strategic information that they possess and know how to make use of it for business.
- Your intellect and skills. The mind is an important resource to mine for business ideas. It may be necessary to first trade your skills in order raise the capital needed your business. What is important is to find ways of monetizing your thoughts and your skills.
- Your networks. The single most important business resource after your skills and intellect, are your networks. Everything in business depends on who you know. Therefore, knowing members of your own network and how they can be of use to you in your business is vital.
- Your position at work or society. The position that you occupy at work or in society, gives you have certain level of influence with certain people that can be used somehow towards providing for your business. By virtue of your position, you may be able to access certain loans, or certain scrap materials or certain discounts, certain services or certain privileges and so on, which can somehow be converted into actual money or into savings of money that you would have otherwise had to spend.
- Your income and savings. Income from current employment and other household income can be a great source of business financing.
- Your other assets. Personal assets that are not in use or under-utilized may be sold to raise money for a business. These assets may be: old and new clothes, old machines, vehicles, equipment, etc. Significant amounts of cash can be raised from these.
- Your name or reputation. An individual is a brand and brands have a reputation as well as convey certain promises of value delivered by the brand. A good reputation that can be trusted is a valuable asset. In business trust is everything. As a result of it, may be possible to access certain favours, certain credit, and certain products or services for which you are currently not able to pay but can be trusted to make good on as soon as you are able.
- Your time. Time is a finite or scarce resource that has value. “Time is money”. As such it can be rented out or used to create tradable products and services. Therefore, it is necessary to:
- Take control of your time and manage it.
- Put a value to it.
- Prioritize and deploy it in those activities that give you the most value.
- Use it to advance your own business interests.
The key is to first assess your personal assets and look at ways of leveraging these assets to raise finance for your business. It is important to move away from the mind-set that suggests that you are powerless until you can get funding from a third party.
Personal fund-raising from which some of the savings for the main business are generated can take several forms. An entrepreneur can use the following means to raise funds for his business:
- Sell your services. Whether or not you are skilled in a particular profession, it is possible to sell your services to someone that may need them. If one has a professional skill then they can provide services around that skill and if not, they can provide general services such as for example, cleaning services, car washing services, handyman services, typing services, lawn mowing services and so on.
- Use your skills to make something for sale. These skills do not necessarily have to be professional skills but can be skills around a hobby for instance, or household work, or gardening, and so on which can used to make a product or a service that can be sold, such as, homemade cereals, lotions, embroidered bath towel sets, homemade jam, bath salts, candles, toys, furniture, and so on, all of which have a market.
- Buy and resell products. It is possible to identify products or services that have a high market demand in every market and then to look for ways to profit from the provision of products or services that have high demand. This can take the form of buying products at a cheaper price and reselling them at a higher price, or repackaging products that are normally sold in larger quantities into smaller more affordable packages, or going to auction sales and flea markets to buy merchandise that can be sold as is or can be repaired at relatively low cost before resale.
- Sign-up for an incubation service. There are government initiatives or local authority initiatives and universities as well as private companies that offers incubation services and accelerator services. These service providers may charge a nominal membership fee or may require entrepreneurs to give up some equity in their business in exchange for the services provided that may include: provision of office space, usage of fully equipped laboratories, provision of funds, marketing support and general business consultancy. Incubators as partners of the entrepreneurs have an interest in the success of their business and work hard to ensure success of the businesses that they are associated with.
- Barter your services or your possessions. The products or services that you supply can be bartered in exchange for services or products that you need for your business. valuable equipment and services can be acquired without paying money for them but by simply exchanging them for what you can provide. For example, you can repair someone’s television set in exchange for an old cash register that you will need to register sales for your business.
- Buy second-hand rather than brand new. Purchasing items for business brand-new is often not necessary. Significant savings can be realised using pre-owned equipment, furniture and other needs that are in good condition and can be used just as effectively as brand-new ones.
- Enter into a partnership with someone. Partnership with someone may be a necessary evil to get the business off the ground or to help it through some critical phases of its lifecycle. A partnership can be an effective fund-raising method. Partnerships can be permanent but can also be temporary if that is what the partners have agreed. These can be dissolved at a given time and the partners walk away with large sums of money that they can use to start their own private ventures.
- Borrow or lease equipment and even staff. Instead of making financial outlays for equipment and even staff, it may be more cost-effective to borrow or lease these. It is not necessary to own equipment in order to do business. All that is needed is access to business needs at a reasonable cost.
- Use low cost services. Services provided by mainstream outlets can be expensive. Therefore, substantial savings can be realised by making use of low-cost services provided by home-based service providers or professionals that are moonlighting or by people that are enthusiasts and have these as hobbies or by retired individuals and students.
- Salvage what you can for your business. Most people own possessions that they no longer have use for and are prepared to give away for free if approached or for a modest fee or in exchange for free samples of your products.
- Borrow from customers. It is possible to borrow money from customers through prepayment of products that have a high demand or through some form club or membership relationship or through some form of crowd funding that involves customers of the product or service.
- Joint venture with a distributor. Entry into a joint venture or strategic alliance with another business that sells complementary products is also an effective method of financing a business and accessing a wider customer base. The entrepreneur has to make the case of how the other parties will benefit in real terms from an association with them.
The keys to effective personal financing for business are: (a.) to have a strong goal of financing a business, (b.) to start from where you are and not to wish to start from a theoretically ideal situation, (c.) to maintain discipline and focus towards the goal of starting and financing your own business.
Personal savings generally come from income earned from employment and personal fund-raising efforts, from extraordinary income such as bonuses, dividends, legal settlements, etc. from investments such as interest-bearing instruments, shares, bonds, mutual funds, properties etc. and from gift income such inheritance, donations etc. The key word in personal savings generation is: discipline and the second key word is: compounding. It takes time to generate adequate savings through compounding and therefore, it requires patience and discipline to watch your money grow. This is easier to do if the goal of forming a business has already been established and the savings generated have already been designated for financing the business. It is important to realise that funding for business is raised in steps. Seldom do entrepreneurs have all the money that they need to put together all the modules of the business that they want. For that reason, modules of the business are ranked in terms of priority and put in place in descending order as more funds become available. Again, entrepreneurs often start with a business that they have to start with, given the resources at their disposal at any particular time, before they can be in a position to enter into a line of business that they actually want. That is, in order to generate sufficient capital and resources needed to support an ideal line of business, entrepreneurs may enter into less ideal lines of business for a period of time.
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- Date : December 20, 2017