While managing your business, you’ve probably made a long list of things you need to do to earn more profits and expand your business. If you’ve been sitting on the list for too long because you haven’t been able to make a decision about where to start, then this article is for you. We’ll help you narrow down your funding options so that you make the right choice for your business.
Let’s dig deeper into the various forms of business financing and help you decide where you should get more financing from.
Bootstrapping is when you completely self-fund your path forward. You don’t take out any loans or provide investors with a stake in your company. Most entrepreneurs use their personal savings, charge personal credit cards, take personal loans or budget strategically to finance their business.
Here’s the reality of what it looks like to bootstrap your business:
Pros and cons of bootstrapping your business
Pros of Bootstrapping
- You have full control over your business
Getting investors to fund your business means giving away a certain number of shares in exchange for funds. It also means that you share the ownership with the investors. Bootstrapping your business allows you to enjoy peace of mind without having anybody else control your business.
- Bootstrapping is rewarding
Successful bootstrapping is hard work. You have to make a budget and stick to it. If needed, you may have to wipe out your savings, without the guarantee of ever getting it back. But if you are willing to make the commitment, bootstrapping is the right way to fund your business.
Cons of Bootstrapping
- You can run into debt
Bootstrapping using personal credit cards to pay for your business expenses can make you fall into a debt trap, especially when you are not able to pay off the credit card balance in full every month. Making only the minimum payments can also ruin your credit history. And when it’s time for you to get an investor later in the game, getting finance can be difficult as investors check your credit before lending the necessary funds.
- Bootstrapping limits your revenue
In bootstrapping you generally use up your own savings. Only a few entrepreneurs have unlimited money that can be used to fund the startup. You should have enough money to keep your business financially afloat, so when it’s time to seek investors, you would have built a business that is already generating revenue. If you don’t have money to grow the business, good enough to catch the investors’ attention, bootstrapping is not the wise choice.
Other Financing Options
- Equity Funding/Investment Funding
To get equity funding or investment funding, you need to sell your idea to the investors. These investors are interested people or companies that are willing to invest in your unique business idea. They evaluate your business closely to gauge the potential and then decide to finance your idea in exchange for some ownership equity. The most popular ones are:
- Angel Investors: Angel investors use their own money to fund a startup in its early stages. In exchange, the angel investor expects a return on their investment and a certain percentage of ownership.
- Venture Capital: Venture capital investors offer to finance new and emerging businesses that have the potential to become a huge success and earn lots of revenue. In exchange for the funds, VCs expect a 15 to 45% of the equity in your business.
- Line of credit. This credit line acts as ready cash you can use whenever you need. For instance, if you need to run a massive marketing campaign, a line of credit can be of help.
- Crowdfunding. You can raise funds through crowdfunding platforms, where small investors are willing to invest if convinced with your business idea. You just need to pitch your business idea with a detailed business plan on these platforms. Although you don’t have to repay the funds you raise or offer equity in your business, these platforms are highly competitive.
- Business loans: This the traditional way to get finance for your business. Banks and other financial institutions provide business loans for small businesses. The lenders ask for collateral, and you need to have a reliable business history and steady revenue to get the loan. But it’s not easy for small businesses or startups because they have insufficient revenue or credit history.
How to decide: Ask yourself these questions before picking up the funding option.
What is the focus of your [future] business?
If business growth is your ultimate goal, it is better to have an investor’s support to speed up the process. However, if you want to upgrade your product with new features, you can consider bootstrapping.
How much time do you have?
If you lack time to tackle your biggest problems at work, applying to multiple banks and investors may take a lot of time. In this case, you can consider bootstrapping or other internal methods of financing.
Do you have financial resources available in your social network?
If you have friends and family who can lend you money, there’s nothing like it. Your personal network of investors can offer you benefits like low-interest rate and flexibility in the repayment schedule.
Does your business need you to closely supervise all the details?
Some small businesses are so innovative that they grow at a rapid pace. If your business sounds like this, then you have to remain highly involved with your company to ensure that it’s going in the right direction and is set for success. Therefore, it is very important that you have full control of your company. This means that it is better not to involve investors who demand equity in exchange for funds. Sharing company ownership with an investor means that you greatly limit your control over the company, which can lead to a big shift in the company’s vision and ethics and that may not be good for your business.
What returns are you expecting from this enterprise?
If you are considering bootstrapping you may not be able to take a salary every month. Whatever you earn goes back to your business as an investment. But if you expect fixed income or salary every month, you can consider involving an investor.