Is one option better than the other when it comes to your small business?
From grants, business loans, utilizing personal credit cards and dipping into savings, entrepreneurs have plenty of options available at their disposal when it comes to funding a small business. Two in particular – bootstrapping or bringing on investors – come with their own share of financial pros and cons.
If you're considering financing your business through either method, here’s what you need to know to get started.
What does it mean in business?
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 the money in their savings, charge personal credit cards, or budget strategically in order to finance their business.
Pros and cons
Successful bootstrapping is not for the faint of heart. If you have trouble sticking to a budget or are scared to wipe out a portion of your savings (that you may or may not get back again), you might not be able to make the commitment.
If you decide that buckling down and making sacrifices is the best thing to do for your business, I would recommend going all in with a bootstrapping strategy. It may be hard work, but it gives you the ability to be in total control. You won't owe anyone anything, and you become the master of your own destiny while bringing the business you're passionate about to life.
Should I bootstrap?
Ultimately, this decision may be contingent on your existing financial situation. Bootstrapping might not be your best funding option if you don’t have that much money saved up.
If this is the case, consider applying for a business grant as opposed to a loan. You will need to meet certain requirements to qualify, but if you are awarded grant money, you won't be required to repay it like you would with a loan. Much like bootstrapping, a grant allows you to continue to be the master of your own destiny!
What do they mean for your business?
From venture capitalists to angel investors, investors are individuals that step in to fund your company with capital that you don't need to pay back.
Pros and cons
"If I don't have to pay these investors back," you might be asking, "then it's basically the same as applying for a grant or bootstrapping, right? Do I still keep control of my business?"
Not quite. In exchange for capital, investors require a stake in your business. This can range from shares in your company to an equity position.
The stake then gives the investor an active role in your business. You might be OK with this at the beginning, but as your business grows, both you and your investors will have a say in how the business is run. In other words, you're no longer the sole owner.
Should I work with an investor?
This decision can be determined by looking into the long term and considering your own leadership abilities. If you know that you're better at coming up with business ideas than running a company, having the insight of investors can help rather than hinder you. But if you'd rather be the boss, you may think twice about working with an outside investor.
Regardless, being approached by an investor is always flattering. Venture capitalists, in particular, keep a close eye on specialized, young businesses, like software startups and apps. These companies are the rising stars of tomorrow. They show signs of steady growth in an emerging market and have the ability to yield big returns. Even if you decline the offer, an entrepreneur who has been approached by investors should know that the action speaks volumes about the nature – and future – of their business.