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We all enjoy the inspirational stories of a founder who bootstrapped (self-funded) their business to success. But bootstrapping isn’t a sure bet for every business, especially for the long haul.
Imagine if buying a house required self-funding. You might still be living in your current home. But more likely, your housing situation would look a lot different without a home mortgage.
The same concept applies to businesses. Self-funded companies can and do thrive. However, businesses that leverage the power of financing may have an easier time growing and achieving long-term success.
Bootstrapping has its time and place. A solopreneur with limited equipment needs, like an accountant or copywriter, may bootstrap forever. Other businesses may be able to self-fund until they reach an “expand or die” tipping point.
How do you know when it’s time to move beyond bootstrapping? Anytime your business is at risk due to a lack of capital, it’s time.
Other red flags include:
Fortunately, small businesses aren’t limited to bootstrapping for their funding needs. There’s a wide variety of alternatives, which means you’re apt to find one that fits your business requirements.
Builds business credit
Some options may not require extensive credit history
“Mom, can I borrow a few bucks?”
Doesn’t build credit history
Credit scores and business history often less relevant that your pitch
Investors may become instant customers and ambassadors
Creates brand awareness
Give up some control
6−8 months at a minimum before funds can be accessed
Requires disclosing financials to public—SEC, investors, intermediary
Legal regulations/hurdles before, during, and after the campaign
No repayment
May target specific businesses or owners
Competitive process
Detailed application and process
No guaranty that applicant will be selected
Formalizes personal network (friends and family) loans
Employee reward/motivation tool (“employee-owned company”)
Lose some company control
governed by SEC rules
Generally does not raise large amounts of capital
Brings new perspectives and ideas
Financial risks are shared
Creates a support system
Expands business network
Splits profits and decision making
Partner’s choices could put business at risk
Favors early stage ideas
“Professional” angels can act as mentors
Requires a rock-solid pitch
Usually requires accepting advice/direction from outside investors
Smaller funding amounts compared to venture capitalist investors
External financing is a loan or other financing arranged through a banks, online lenders, or microlenders. Business loan options include:
Depending on the type of financing, funds may be used for a specific purpose (e.g., equipment purchase only) or be used as needed (e.g., hire employees, smooth out seasonal fluctuations). The loan amount may either be a lump sum or available to draw upon as needed.
Learn more: Securing Business Funding
Money from friends and family can be easier to get up front and can be structured any way the lender wants, including as:
You can usually use these funds for whatever you want, but be sure to treat it with extra respect because you may have to sit next to the lender at Thanksgiving dinner.
Learn more: Borrowing from friends and family
This is what you’d do on platforms like Kickstarter and GoFundMe to raise money for building your product or service. The lenders in these cases would be regular folks who believe in your idea and want to see it succeed. Securing this money involves:
It can take a while to reach your funding goals on these platforms if your idea isn’t a no-brainer winner.
Learn more: Equity Crowdfunding
Depending on who you are and what your business is, you might be eligible for a government grant, which you wouldn’t have to pay back.
Grant money is closely monitored so prepare to report frequently about how and where the money is used.
Learn more: Find Grants
Among the most tried-and-true methods of fundraising, this is where the company sells shares on the open market to investors, employees, and whoever else wants to be involved. It’s relatively frictionless because the entire process is in your control, starting with:
Like with crowdfunding, you’ll have to give up equity in your company.
Learn more: Offer Shares
You’d take on a business partner who brings something to the business that you can’t, be it skills, connections, patents, etc. This approach can be tricky if you choose the wrong partner because you’ll have to share:
Note that you don’t have to bring on a partner as a true 50/50. You can structure the split however you want.
Learn more: Taking on a partner
An Angel Investor is an individual who provides significant funding in exchange for equity, like on Shark Tank. Angel investors normally seek out early stage companies so they can take a role in bringing the idea to market.
Finding an Angel Investor involves:
Like with crowdfunding, you’ll need a rock-solid pitch: you’re selling the angel investor on your idea.
Learn more: Finding an angel investor
The critical thing to remember is there’s no “best” or “worst” option. One option may be the golden egg for one business while it’s the rotten egg for another.
My relatives formed a partnership business to flip houses. The expectation was that some partners would provide sweat equity (upgrading light fixtures, replacing drywall, etc.) while those lacking manual labor skills would give cash for purchases. Profits would be reinvested to buy the next property.
Did the partnership work? Yes and no. Family ties were strained for a while due to a difference in work ethics. The older generation showed up at the crack of dawn to work while the younger generation rolled onsite at noon. The success factors included a small profit that was split after the partnership was dissolved and the ongoing family legends (“Remember that time you stepped through the attic floor and landed in the dining room?”).
And no doubt, everyone has both a horror and success story from family lending. Twenty years after the money was loaned to a relative to start an (unsuccessful) cleaning business, we still hear about the lack of payments. On the other hand, I know a family that regularly loans money to each other for companies ranging from cleaning services to personal fitness consultants. At last count, that family had 4 separate profitable businesses and strong family ties.
Or how about the external financing options? Akinwale Akinsitan, the owner of Aladun Grills, used equipment financing to turn his side-hustle into a full-time business. But a 22-year-old I know has spent 6 months trying to secure a startup loan through a small-town bank.
Whatever the financing source, success depends mainly on realistic expectations, a sound strategy, and a solid business plan.
Funding and jigsaw puzzles have a lot in common—each piece that is put in place lays the groundwork for the next round.
You secured a grant due to your solid business plan. You diligently tracked and reported on fund usage. Fast forward a year. That same business plan and your proven accountability could be used to pitch your goals and objectives to an angel investor.
And, just like puzzle pieces, if one financing option doesn’t fit your needs, try another one. Imagine a pet grooming business expanding into mobile services. A new truck could be financed via equipment financing or a traditional loan. The “best” option would depend, in part, on that business’s history, credit score, and other factors.
What if that business was a pet grooming startup with a novel twist, say, combining dog wash services with manicures for the waiting humans? In that case, the “best” financing may be an angel investor with a soft spot for fluffy dogs.
Just like there’s no perfect business idea, there’s no one “right” financing option. The key is to recognize when your business could benefit from financing and make it happen.
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Katherine O'Malley is a contributor to the Lendio blog. A technology geek at heart, she splits her time between traveling, freelance writing, database administration work, and implementing SEO on her travel blog. In her free time, she loves to research the challenges small-to-midsize tourist suppliers face and find ways that technology can help them out.
Blog
10 min read • Aug 19, 2022