Financing or Bootstrapping: How To Decide Which Funding Option
While managing your business, you've probably thought of a long list of things you should do to make more money and expand. For example:
- You should find ways to do more with less time.
- You should monitor and adjust your budget so that it makes sense for your needs.
- You should consider how to get more capital to develop your company.
However, your list of things you should do for your business has probably been sitting around for a long time because you can't make a decision about where to start.
Let's make this process easier and just narrow it down right now to the one point that will solve a lot of problems for you at once:
You need to get more capital.
With a bigger budget to work with, you'll be able to get more staff to help your growing customer base, buy important equipment you need, expand your advertising reach or get professional advice from authoritative consultants.
Now how do you decide where you should get more financing from? Is it better to tough it out and finance yourself as a "bootstrap" business owner, or would you be better off getting an official loan or other traditional financing options?
Go through the following business-financing checklist to find out:
1. How Much Time Do You Have?
Write down your biggest problems at work right now. If lack of time is a big issue for you, then you might want to consider personal, internal methods of financing. Applying to multiple banks and investors for loans takes a lot of time and research.
The more money you need to boost your company, the more legal hurdles you'll have to jump through to get that investment from a certified lender.
2. Do You Have Financial Resources Available in Your Social Network?
If you can borrow what you need from friends and family, then "bootstrap" away! Your personal network is likely to offer you added benefits you won't get elsewhere like low-interest rates, extra grace periods and more flexibility in your repayment schedule.
To protect both yourself and their best interests, do take the time to draw up an official promissory note listing the terms and conditions you decide on for the loan. If you have a good credit score, then you can also consider applying for a business credit card to raise your spending limits while you tackle your biggest expansion problems. Just make sure that you can reasonably afford to make the payments on your new cards in the long run.
If you don't have the funds available in your network, then you may need to take out a business loan from a bank or sell some equity of your business in exchange for startup capital.
3. Does Your Business Need You to Closely Supervise All the Details?
Sometimes small businesses that start growing very rapidly are so innovative and new in their field that they're redefining a market niche or creating a whole new market. If this sounds like your business, then you do need to remain highly involved with your company in order to set it on the right course for long-term success. Especially while you're developing new products in a budding market, it's important to keep as much control of your company as possible. That means it's better not to accept capital from big investors who will greatly limit your equity, which can lead to a big shift in the company's vision and ethics that you may greatly regret later.
You can always accept outside investments later on in the future when you've built solid foundations for your business first.
4. How Far Along is Your Business in Your Five-Year Plan?
If your enterprise is still relatively new and it's your first business, then bootstrapping is a great idea. It makes you become a better manager when your budget is small and every dollar really matters because then you develop a greater awareness of your finances. By learning some basic accounting skills in the beginning, you'll also be able to understand your professional bookkeeper whenever you decide to hire them in the future after you've expanded more.
Have you already built up a strong customer base over a year or two and feel ready to expand much more? If you're not buried in debt, then you're ready to apply for the larger business loans from a bank or other credit agency that can take your venture to the next level.
Since your business has already proved its potential, this option is a great way to keep full control of your company while you grow.
If you do have lots of debts but you still have built up a good customer base, then selling equity to investors is a much faster way to remove your personal debts while achieving massive growth at a much quicker pace. While you may have to compromise more with other members of your board, the trade-off is often worth it in exchange for the rapid revenue increases you can reach.