As you start your own business, there are a lot of decisions you have to make. Although small business owners make many decisions every day, one of the most important decisions you can make at the beginning of your small business journey is whether to use your own money (bootstrap) or take out a small business loan to get things rolling.
There are pros and cons to each, and in this article, we will discuss what bootstrapping is, what it means to bootstrap a business, and whether bootstrapping or taking out a traditional bank loan is right for you.
In terms of small businesses, "bootstrapping" a company means you begin operations with minimal investment or financial help. As a small business owner, bootstrapping often requires using your own personal money as the source of venture capital.
There are many reasons business owners decide to bootstrap their small business instead of applying for a traditional business loan or pursuing funds from the small business administration. Small businesses that don't apply for financing and instead only operate off their working capital have the luxury of opening a debt-free business and avoiding the obligation of loan payments. Beyond that, here are just a few pros startup owners may tout when bootstrapping a company.
You probably won't be surprised, but startup companies often use bootstrapping to cover basic operational costs and prove their business idea on a fundamental level. Someone who thinks they have a great business idea may use their personal savings as venture capital or to cover startup costs.
No matter what the money is used for as part of starting the new company, you’re bootstrapping if you're using your own capital as the funding option instead of bank loans. Doing so allows entrepreneurs to focus more on creating a functional, profitable business out of their business plan and less on finding lenders, worrying about the interest rate, or generating enough cash to cover a monthly payment on a small business loan.
Starting a new business always requires some upfront money. But, depending on the type of business and the industry you're in, that initial value might easily be found in your own savings account, as gifts from friends and family who support your creative endeavors, or from an angel investor or grant.
If you decide to bootstrap your startup costs, you avoid having a payment due to your local bank or credit union every month. No loan payments due also mean you'll never have a late fee and that any cash flow you earn can immediately become working capital in your own company. It doesn't take long to make returns when you invest in yourself.
Bootstrappers are often startup founders who like to keep a close watch on operational costs. Someone focused on cost control may not want the extra expense of equity financing on their books.
Even if a small business does need a bank loan to get started, a bootstrapper will try to borrow the minimal amount necessary to cover essential aspects like buildings or equipment. They may carefully compare their options and find lenders with flexible options for a low-interest rate and no prepayment penalties. They’ll often extend the business loan repayment period to make their payments as small as possible.
All the above may sound like great reasons to bootstrap your business. Many successful companies and small businesses have started this way. However, there are a couple of drawbacks to this way of funding new businesses.
Missing out on money that could fuel faster, more significant growth is one of the biggest downfalls to bootstrapping and using your venture capital. By starting your small business only with money you already had in savings, for example, you may miss out on the opportunity to explore more effective revenue options when emphasizing a low-scale operation.
High-growth companies that have enough funds to test, gain customer feedback, make adjustments to their service lines and products, and stay current on their proven marketing platform likely had an infusion of cash at some point. However, when you do not explore individual investors and business financing options, you have fewer resources to invest in diversification and growth.
Bootstrapping your small business can also put you behind other small business owners who did start their business with a more considerable investment. If another small business owner took out small loans to start their small business, they might be better equipped financially than you are.
When you bootstrap your company, you sacrifice many financial benefits and rewards to stay at the lowest tier of financial risk.
All bank loans are always debt. You will have to pay back the loan at some point. It's important to clarify here and now that debt isn't always bad. When you use debt to make more money, this is called productive debt.
Businesses should look closely at their financial projections and decide what business goals they could accomplish with a cash infusion. If purchasing new equipment or opening a second location, for example, could double or triple revenue with only a slight bump in operational expenses, it may be in the business's best interest to pursue funding. Debt can be an excellent tool to meet your funding goal and help your small business reach that next tier of profitability.
You may realize your business is too big for your current office or warehouse space. Business growth is impressive. But what happens when you find yourself in a position with positive annual revenue but not enough money to buy a location? This is when you might turn toward funding opportunities to get you to the next level with your business.
When you start a company, it can be very costly and require a good amount of venture capital. But, when you have followed your business plan and proven yourself as a successful small business, you may need to purchase new equipment or hire staff to help keep up and improve your business offerings, quality, and efficiency.
Inventory is the most costly of things for small businesses, and purchasing items to sell or create your product can quickly eat up any money you have. However, no inventory means you have nothing to sell, which means you can't make money. In this case, funding options may be your choice.
Taking out a loan to help your small business should never be considered a failure or reflect poorly on you. On the contrary, when you take out a loan to help you achieve your business plan, you invest in yourself.
This decision of whether to bootstrap your start-up or find funding elsewhere is ultimately up to you. However, here are a couple of crucial points to remember about each option.
Suppose you decide to look at funding options for your business and take a loan out at a traditional bank. You can generate higher rates of return on your initial investment by leveraging other people's money, building relationships, and maybe doing more for your business than you could have with only a few thousand from your savings account. Remember, you can always decide how much funding you will accept, carefully examine interest rates, and make specific requests about the fine print on any loan you choose to pursue.
Suppose you decide to bootstrap your company and use your own venture capital to start-up or expand. In that case, you are mitigating your risk and not having to worry about trying to find lenders, repay loan payments, or become responsible for late fees.
Small businesses and business owners can get started using either method, and you can become successful either way - using venture capital from your savings or through loans. I encourage you to examine your own business goals, your financial statements, and what it might take for you to achieve those goals within the timeframe you desire.
If you need help assessing whether you should pursue a loan for your small business, I'm here to share my experience and walk you through the criteria to qualify, step by step.
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