Bootstrapping going by the author of the Ulysses, James Joyce implies forcing your way to the top from the lowest of ranks by the aid of your bootstraps. Today more and more people are creating ventures and funding them as well from their own resources and efforts.
Bootstrapping is a common way to fund a prospect. It is estimated that at least 80% of all startups rely on personal funds from their founders for operations, albeit in their formative stages. Putting your personal savings has its advantages and its disadvantages as well.
The greatest danger lies in its ability to tie you to your venture’s risk and rob you of your savings as well if the correct measures are not put into place. So, below is a list of steps you should undertake that ensure that your money is adequately channeled into your trade.
1. Set obvious parameters
If you have been self-employed, you probably have had episodes where you cannot clearly differentiate between work and personal finances or time. When these lines are blurred, there is often eminent burnout as a result of overworking. In matters finance, it could leave you or your business in a financial mess.
If you have decided to fund your trade from your savings, you need to separate your personal account from your venture’s account. Failure to do so might leave you liable to tax and accounting liabilities. It is paramount, hence, to ensure that your trading account only pays for business-related expenses.
If you need any money from this account, let it be in the form of a salary. Most startups often forget this vital element, which often forces them to use the trader account to meet their personal needs. It pays to draw the line and separate your funds from those of the startup.
Once you have the account set, then ensure that all the money in that account is correctly accounted for. Track every dollar that the venture owes you and get to know from the very onset, just how much ownership of the firm you are entitled to.
2. Set up a legal entity for your business
Get in touch with a law professional and establish a professional entity for your startup. A limited liability company status, for instance, will protect you from your business’s legal hurdles and their costs too. Such an entity will free you to make decisions for your trade without having to worry about the security of your personal property.
If you fail to take this step, your personal assets and savings could be seized if the venture gets into financial trouble. Without the protection, the legal status grants your company, all you own in and out of your trade pursuit is a sitting duck waiting for the worst to happen.
3. Fund the business account
You need to establish a clear transaction record between your personal account and your trading account. The transaction record should show how much you have funded the business with. It is easier to move the amount you are investing in your company at once, lessening the accounting process.
Ensure that the amount you have given or invested in your business is clearly recorded in your accounting books too for future reference.
4. Plan ahead
Investing or loaning your money to your startup implies that you are willing to live without the extra cushion that those savings would have given you in life. If could mean that you might need to forfeit your holiday plans or to put your home ownership plans on the line with mortgage refinancing.
You, consequently, need to ensure that the money you have put into your trading pursuit is recorded either as a loan to the startup or as equity. What’s the difference? If you, for instance, record the full amount as a contribution, then your business does not owe you at all.
What it means is that you will partake of the venture’s future success for playing a role as its founder and funder. If you, therefore, do not expect repayment from your savings, then this is the way to go.
If however, you have funded the startup by placing your financial future in jeopardy through personal or remortgages, then you should expect a payment to help you free yourself also from debt. If for example, you have used up part of your retirement funds to fund the startup, you will most likely need to pay the money back so that you are protected in your old age.
Money that is loaned to a venture in this manner should, therefore, be recorded properly so that you can receive your dues in time.
5. Balance your balance sheet
You should ensure that you in your accounting books, there is a journal entry that debits the funds given to your trading pursuits. Once the cash is debited, an increase should appear in your asset accounts.
Afterward, credit the venture’s capital account to ensure that it reflects the funds that you have brought into it. The two figures should balance your balance sheet because they are identical in quantity.
6. Reconcile the deposit
With the assistance of accounting software or some good old accounting techniques, check to ensure that the deposit reflects on the previous book’s cash balance. Add also your deposited funds to the conventional stock balance.
These steps will ensure that you can take your invested funds back from your ventures if the need arises in the future. The new balance should be added to the owner’s equity on the balance sheet.
The funds you have give to bootstrap your business should be listed either as;
- Owner’s equity, if your trade is a sole proprietorship or retained earnings if you have established a corporation status as the legal entity of your trade. If you, accordingly, decide to withdraw the contributed amount to go and pay off your other financial obligations, then you will not get taxed for the amount. The only consequence there is for such investments is if they have been used to appreciate assets that depreciate over time.
- Stockholders equity, which means that if your startup flourishes and more contributors and partners want a piece of it in terms of shares, your investment will be clearly highlighted.
Number of personal money sources that you can use to fund your business
This is, of course, the easiest and most affordable method of trade financing. Having a good amount of cash, squirreled away for your business beats most other methods of venture financing. It is cheap, accessible, and fast.
Savings are definitely a safer form of debt that a commercial loan because a bank will not be breathing down your neck each month for repayments. They are also flexible sources of financing because you can direct them to areas in your startup that needs them the most.
If a large amount of your mortgage has been paid off, then you stand an excellent chance of raising a significant amount of money from a remortgage. Remortgages are easier to access than other forms of debts, and with them comes better and affordable repayment terms.
- Private borrowing
A large number of startups are often funded by the people that believe in their founders the most. These are family and friends that help with your startup bootstrapping. A loan from such circles is friendlier than a bank loan and more forgiving too since with it you do not have to worry about your credit score. Ensure, however, that the repayment terms are stipulated from the onset and adhered to. Be professional and draw up a legally binding agreement unless their investment is a gift to your business.
- Credit card borrowing
These loans are not ideal for long term borrowing because they are high-interest rate loans , however for short term these can be very helpful , to find a credible lender use , realisticloans.com or any service that can find nearest lender. They can, nonetheless, work for short-term, but they must be paid back on time to prevent penalties and poor credit scores.
- Asset selling
If you have valuable commercial interests, you could quickly get enough funds from their sale to set up your business. You should, nonetheless, be careful about selling your assets and especially avoid doing so under pressure because you could end up giving them up for low values.
The final word
Starting and running your own business is one f the most satisfying things in life, but it has its own hurdles as well. To eliminate the personal risk, follow the steps above, which should give you the confidence you need to pursue the growth of your startup.