For many aspiring entrepreneurs, one of the first questions they ask is, “How can I fund my business?” Studies show that less than one percent of entrepreneurs come from extreme financial backgrounds, meaning they’re often neither very rich nor very poor. Despite this, there are some meaningful startup costs that could make a dent in your everyday bank account, including registering your business, setting up the infrastructure of a new company, and getting your marketing efforts off the ground.
So how do most small business owners get started? Roughly 82% of entrepreneurs are self-funded, but that’s not the only way to go. Particularly if you’re starting a restaurant, coffee shop, construction business, or any other business that can’t be delivered purely online, you might be asking, “how can you self-fund every little bit?”
There are three main avenues for funding a business: bootstrapping, debt financing (loans), and equity financing (investors). There are pros and cons of each, but for now, we’ll just introduce you to what each of these terms means at a high level.
Bootstrapping
Bootstrapping refers to the practice of getting a business off the ground from your personal finances (alongside operational revenue from your business). Bootstrapping has several advantages, but the most commonly cited one is that you retain full control of your company. As compared to other funding options, the buck truly does stop with you. You can manage and direct your company in a way that is in line with your own vision instead of the views of other stakeholders, or not have to worry about interest expense from loans adding to your costs.
Many entrepreneurs highlight another pro of bootstrapping: this model forces the entrepreneur to learn quickly and adapt. With limited resources, it becomes exceedingly important to test every idea thoroughly before charging head-first in a direction, and it requires every mistake to be a learning opportunity.
The drawbacks of bootstrapping are obvious: your personal finances are on the line, and your ability to think big might be limited.
How to know if bootstrapping is for you:
- Are you able to think big, but act small for the time being?
- Will using your savings and other personal financial resources put your financial future in serious jeopardy?
- Is the minimum viable version of your product affordable with your current resources?
Debt Financing (Loans)
Debt financing is also very common among entrepreneurs. Luckily, this term needs a little less explaining: it involves using loans to get your business off the ground. Think about this along the same lines as taking out a loan for your car; you’ll receive a specific amount of money, and you’ll pay it back with interest.
Similar to bootstrapping, debt financing allows you to remain in control of your company’s direction and operations. It also allows you to work with a larger pool of cash to get through the next phase of your business.
On the down-side, incurring debt can be a real turnoff for many entrepreneurs. It has the effect of turning your casual side-hustle into a long-term commitment. The process of securing a loan can also be a little long and arduous, with varying lengths of applications and collateral requirments. As an entrepreneur, you should be as careful about the loan you choose (weighing their interest rates in particular) as you would be about your child’s college loans.
How to know if debt financing is for you:
- Are you willing to incur debt in order to grow your business?
- Do you need a large sum of money before taking on the next step of your startup?
- Are you able to provide collateral for your loan?
Equity Financing (Investors)
Finding investors is an almost cliche phase of starting a business with how commonly it’s spoken about in the media. Equity financing, or finding investors, involves giving up part ownership (equity) of your business in exchange for a set amount of money.
As you can imagine, part-ownership in your business often means part-decision-maker as well. After all, your new partner won’t have any payout for their investment if your business doesn’t succeed. Despite losing some control over your business, equity financing has several great pros:
First, this is an opportunity for many entrepreneurs to bring in an experienced professional who can help advise on a particular industry or business practice. This is a huge benefit to many entrepreneurs who are just getting started in business management.
Second, along with debt financing, receiving a lump sum of money is a great way to make a large investment that your bootstrapping budget wouldn’t otherwise allow. Looking to open up a brick-and-mortar or relaunch a complex website? If you find yourself unable to move forward with one piece of your business at a time, equity financing could unlock a valuable next step.
How to know if equity financing is the right choice for your business:
- Are you willing to give up part-ownership and some control in return for building your business?
- Do you need a large sum of money before taking on the next step of your startup?
- Are you in an industry that requires a high level of expertise?
Whether you’re looking to get your business started or to expand an existing company, you’ll need to know where to get the money from. Be sure to make the right choice for your business.
