Which one is a better option for funding your small business? Bootstrapping or investors?
You may have that big idea to make you become the next Google, Facebook, Uber, or Airbnb, but if you do not have the capital to put that idea to action, then it would be all for naught.
Forming your own company is truly taxing physically, emotionally, and financially. Most likely, you will need a group of talented employees, a website, an office space, and enough cash to pay for utilities. It is advisable to have at least six months’ worth of funds set aside to pay for all these requirements.
Of course, you can dig deep into your pockets and pay for everything yourself. A lot of people have gone this route, but what if you do not have enough funds in your bank account?
The good thing is, you are served a plethora of funding options to start your small company. All you need is the right information to take full advantage of what is available to you. Today, we will help you carefully analyze which method of financing best suits you.
Bootstrapping
When we say bootstrapping, you will be using your current resources to jumpstart your business. It does not have to be entirely about cash; you can use your laptop or personal computer, your garage space, and other stuff that can help you put your ideas to reality.
You can maximize all your resources to minimize costs and grow your business. After your business is off the ground, you can use the income earned to fund your company.
We list below how you can bootstrap your business.
- Renting your home
If you want to, your house can be a potential income generator and a good option to fund your startup. You can use Airbnb or other platforms to rent out your house or a spare room for a few nights every month.
- Crowdfunding
Crowdfunding is another option you can look into. There are online crowdfunding platforms wherein you can pitch your idea to thousands, or even millions of people who are interested in investing in startups like yours. If your business plan is good and they like your idea, each investor would contribute a few dollars. In exchange, you can give them some perks or rewards like souvenirs or samples of your products.
You can take a look at Kickstarter or Indiegogo if you are curious about this form of funding.
- Personal credit cards
Some entrepreneurs charge their credit cards to fund their companies. While credit cards charge high-interest rates, keep in mind that as long as you pay in full each time the bills come, you are virtually borrowing money for free!
- Personal savings
If you believe in your idea or product, then you can use part of your savings. You would not owe anyone any money, so you are answerable to no one. The downside is that this might take years before you get enough money to start your business.
Bootstrapping advantages
- The business belongs to you
One great advantage of bootstrapping is that you have 100% ownership of your company. You do not have to answer to anyone, and you can run it the way you deem fit.
When you seek investors for financing, they generally take a certain portion of shares in your company. Most of them also seek voting rights, so you cannot just make any decisions that you think would help your business by yourself. With bootstrapping, you are in control
- You practice better budgeting and spending habits
Since you know it is your own money, you will most probably be more careful spending your budget than if it was other people’s money. It is what it is.
- Bootstrapping is rewarding
Bootstrapping is tough. You will have to sacrifice your savings and stick to a budget. But, if you are willing to commit, then you will find it rewarding.
You should build an airtight bootstrapping strategy then go all-in on it. Indeed, it is hard work and is not for the faint of heart, but it will give you total control when bringing your passion – and your business – to life.
Bootstrapping disadvantages
- You might find yourself deep in debt
We mentioned earlier that using your credit card can be a good way to fund your business, but it comes with a big IF. You must pay off the whole amount you charged every time it is due, or at least as close to the full amount as possible. Do not make minimum payments as it will only result in more debts due to interests and thus potentially ruining your credit history and your cash flow.
Another reason why you should be careful not to incur too much debt is that if you invite investors to invest in your company, they may want to look at your credit. If they see that you are deep in debt, they might not lend you money.
- Revenue is limited
It may be unfair, but only businesses with huge funds are capable of scaling. If you are bootstrapping your business, you are limited to your funds when running your business. Unless you are Jeff Bezos and have an overflowing supply of cash, your revenues will somewhat be limited.
Your startup should therefore be generating income through your products or services so that your company can stay afloat. One day when you decide that it is time to scale up, future investors will see how your company earns revenue.
Raising funds through loans or investors
If bootstrapping is not for you at this moment, you still have other financing options.
- Equity funding
You can raise capital through the sale of shares. Investors will purchase shares in your company, which would mean they will be part owners of your business. You can invite family or friends to purchase stocks or go public via IPO.
The advantage of equity financing is that it will be easier for your business to grow. You will have more funds, and investors can also act as mentors who can help you improve your business.
Since your investors are your co-owners, you do not incur debt. If your business does not become successful, you do not need to pay them back. Your business also does not need to pay interests.
There are disadvantages, however. The biggest one is that you will lose full control of your company. The rights to your ideas, your business plans, and decision making will also belong to other people.
- Angel investors
Angel investors are usually well-established individuals with high net worth and are looking to help future startups. They invest in the early stages from $10,000 to millions.
- Venture capitalists
If you decide to approach venture capitalists, you need to have a business plan devoid of holes. In exchange, they might give you large amounts of cash for your business.
Venture capitalists invest in several startups on behalf of their clients with hopes of making money for their clients and themselves. You are therefore up against plenty of competition, and getting the attention of VCs is challenging. This is where your connections can help you; if you know someone who can introduce you to VCs, it would be a huge advantage.
- Bank loans
You can go to banks and apply for loans. However, you need to prove to them that you are capable of paying them back.
While it is difficult to get a loan from a bank, getting one means you would not be giving away ownership while getting that much-needed funds to start your business.
Advantages of getting outside investors
Having investors on your side will not only give you access to cash, but also a treasure trove of valuable advice. It will be especially helpful to you if you are a newcomer to the business world.
Disadvantages of getting outside investors
While this is a good way to raise capital, it can also cost you a lot. The more cash you receive, the more equity shares your investors will take.
If you decide to borrow money instead, you will have to pay interest over a fixed period. It could put added strain on you, especially if you are just starting.
Conclusion
Going back to our initial question of which one is better, it will depend on your financial situation. If you do not have that much money or assets yet and cannot wait years to start your company, then bootstrapping is not for you.
Investors, on the other hand, will give you the funds you need to start. Aside from that, they can provide mentorship to make sure you are on the right track. But if you would rather run things by yourself, you might have trouble working with investors.
Regardless of which path you want to take, be sure to be well-informed. If you want to go bootstrapping, you may want to consult with a financial professional first. Financial advisors can help you determine whether you are capable of bootstrapping or not.
If you decide to look for investors instead, choose your investor wisely since you may be working with them for a long time.