Funding from Personal Contributions of Founders
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Seed funds for a startup business ventures generally come from a combination of personal savings and bootstrapping by the founders. Entrepreneurs will use personal assets and may incur personal debt to fund the early stage venture. Personal guarantees of commercial debt are covered in a separate lecture. Common methods of acquiring funds from personal assets include:
- Cash on hand and Savings Accounts
- Borrowing against retirement Accounts
- Selling of personal assets
- Particularly common to cash in chattel paper or other semi-liquid assets.
- Example: Selling stocks, bonds or whole life insurance policies.
- Home Equity Loans
- This is where you take out a loan against available equity in your home.
- This method generally provides a much lower interest rate than other types of commercial loans.
- The principal payments go back into your home and the interest is tax deductible.
- Personal Credit Cards
- Credit cards are good to cover startup expenses of small businesses.
- Generally, they are more useful to add liquidity (cash is more easily available) in an operating business.
- If you have a credit card, you have a built in line of credit. Although credit cards are one of the most costly ways to finance your company, they are routinely used as a source of funds for start-up businesses.
Bootstrapping is term used to refer to situations where the entrepreneur splits her time working a job that finances much of the entrepreneurial venture. That is, the revenue generated from some other sources is allocated to fund the business venture. Bootstrapping is very common in early stages of business ventures. Once the venture achieves growth or traction, the entrepreneur must make the difficult decision of when to devote all of their time and effort to the startup venture.