What is bootstrapping?
Building your company from scratch using nothing but personal savings and the money generated from sales.
• You’re 100% in control of your business and can grow at your own pace, without external pressure.
• You retain full ownership, without having to give away any equity.
• You won’t have to spend valuable time fundraising and can stay super-focused on your priorities.
• There’s financial risk. If the business fails, it’ll be you that has to pay for it.
• It requires quick success. You’ll need revenue – and a profitable model – quickly as you’ll soon run out of money if only relying on personal savings.
• It’s all on you. You’ll have to rely on yourself to network and connect with the right people.
• Growth can be slow. As you’ll be growing organically, certain aspects of the business – such as product development – might be slower than you had hoped.
Loans and other debt financing options for raising cash
Taking funds from an external source (often a bank) that have to be paid back – with interest – at some point in the future.
• You maintain complete ownership, so can run your business however you see fit. If you do one day sell, you won’t have to pay back investors.
• Once you’ve paid back the loan, your liability is over – it can be far cheaper than going for equity.
• You can get tax benefits. The interest can be classed as a business expense so you can deduct it from your income tax when the time rolls around.
• The vast majority of loans are secured – meaning you’ll need some form of collateral, be it equipment, real estate, inventory or a personal guarantee.
• Repayments have to be met whatever happens, so you may have to risk assets, such as your home.
• Interest rates for paying back the loan can be high – and can fluctuate over time unless fixed.
• It’ll affect the value of your business. Taking on too much debt can impact profitability and, in turn, the valuation of your business – making it a less appealing proposition for investors if you do one day decide to sell.
Friends and family
It's possible to take a loan from your friends, your family, or both.
• It should be an easier way of getting funds (in theory) – you shouldn’t need to jump through as many hoops as a bank would demand.
• Interest rates should be lower. Unless your pals or family are loan sharks, it should be cheaper to pay back that loan than other sources. You may well get more slack on repayment terms, too.
• You’ll be able to share the wins together.
• It could affect personal relationships – particularly if things go south.
• The amount of cash you’ll be able to get hold of is limited, unless your uncle is Jeff Bezos.
• You might not get the assistance – or connections – that other external investors will provide.
What is an angel investor?
An individual investor who provides funds for a business or company in exchange for ownership equity.
• It’s less risky than taking on a loan or other debt – if your business fails, you don’t have to pay back the money you’ve raised. Most angel investors take a long-term view.
• It suits riskier ventures. Angel investors are far more likely to take a risk on you, whereas a bank might not.
• They’ll play an active role. Most angel investors will want to play a part in the business – and should come with useful connections and support.
• You lose some of your control. Playing an active role means having a say in the decision-making process – and your strategy.
• You’re giving some of your future profits away. As well as a chunk of the returns if you ever sell your business.
• Fundraising can be very time consuming.
• Most angel investors expect to make a big, profitable exit at some point. That can mean added stress and tensions arising.
What is crowdfunding?
A way of raising funds by asking a large number of people for a smaller amount of money.
The main types are:
1. Rewards-based. The most common type, with varying levels of non-financial rewards depending on how much is pledged. Kickstarter is the prominent player.
2. Equity. When you give shares in the company for funds.
3. Lending. Raising funds in the form of loans with a set interest rate and time frame.
4. Donation. When there’s no return on investment – typically only for charities or social causes.
• You can reach a global audience – and build some early hype.
• You can test the idea. You’ll get an early sense of whether there’s appetite for what you’re building.
• It’s a lot of work that could all be for nothing. In some campaigns, if you don’t hit your target you get nothing – meaning you could waste a lot of time and effort.
• It increases the pressure.
• If it’s rewards-based, you need to deliver what you promise to maintain your reputation.
What is venture capital?
Raising large amounts of investment from individuals or professionally managed companies. Forget the narrative that every business owner should go after VC funds – this is really only for companies with super-high growth potential.
• Speed. With the huge boost of investment you’ll be able to move quickly – important if you’re on the crest of a wave.
• It removes the chance of early failure. You’ll be able to get going without the fear of being unable to pay the bills.
• You’ll attract top talent.
• The venture capitalists will be brand ambassadors and open doors, plus offer support.
• It’ll take time and resources to fundraise. Pitching is very tough and often unsuccessful.
• You’ll lose equity and control. You’ll no longer be in charge of decisions and your direction.
• You’re committing to one day selling your company – VCs are only interested in big exits and their timeline might be different to yours.
This article is taken from Courier’s How to Start a Business, a comprehensive 10-step guide to launching a business. From finding your big idea and doing the research, through to developing your product or service, building your brand and getting the word out, How to Start a Business is packed full with expert insight, tips, case studies and key info from those in the know and those who have done it before. Head this way to buy a copy on Courier’s web shop.