When you think about funding your business, there are three options available:
Bootstrapping: this is the term used when an entrepreneur or small business owner takes no outside funding from investors or loans from lenders. Bootstrapping a business means you grow it organically and reinvest profits back into the business to help it grow.
- Advantages: Retain full ownership and control of your company; you don’t owe any money to anyone; ability to choose the direction of your company and make all key decisions; forces owners to be creative and efficient with funds available.
- Disadvantages: May take longer to grow and expand your business; you will not have much disposable income; not practical for businesses that need large amounts of capital (like manufacturers); inability to leverage the networks of investors.
Financing: accessing debt capital from a bank, credit union, or other lending institution that must be paid back over a defined period of time and accruing interest at a specified rate.
- Advantages: Loan amounts can range from small to large depending on company’s needs; debt does not include equity in your company; there are many types of lenders including traditional banks and alternative lenders; government institutions like the SBA support and underwrite some loan products.
- Disadvantages: Loans require some type of collateral, which may include business assets or event personal property of owners; many lenders are wary of loaning to young companies; loan terms are generally not as creative and flexible as equity stakes; if you default on a loan, lender will likely have access to company assets; banks may require you to adhere to certain restrictions (like maintaining a certain debt-to-equity ratio).
Investment: seeking outside money from an angel investor, venture capital firm, or a variety of other sources (including friends and family) in exchange for equity (ownership) in your company. Entrepreneurs usually seek investment when they expect their company to grow large very quickly.
- Advantages: Ability to raise large amounts quickly, sometimes over multiple rounds of investment; gain access to other resources when partnering with investors (highly qualified employees; access to other investors; strategic business advice; etc.). Investors can also devise a wide range of ways to structure their investment (like a combination of debt and equity), which can provide you and them with flexibility.
- Disadvantages: Investors generally take ownership of a percentage of a company meaning you no longer have full control; your long-term goals may not align with investors’ goals; investment amounts vary but most professional investors won’t invest less than $100k, and some firms won’t invest less than $1 million or more.
Estimate the amount of funding you need.
To secure financing for your business, start at the beginning: how much money do you need and for what?
- Tips on estimating startup costs (SBA)
- Online startup costs calculator (Bplans.com)
- Small Business Development Center (SBDC) counselors can also help you determine your startup or expansion financing needs