Both methods can get your business up and running. But which is best for your situation?
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by Brette Sember, J.D.
Brette is a former attorney and has been a writer and editor for more than 25 years. She is the author of more than 4...
Updated on: October 26, 2023 · 5 min read
Small businesses need money to grow. Consider bootstrapping or equity financing to get your business the cash it needs.
Quite simply, bootstrapping means being frugal and creative when it comes to business finances. Bootstrapping usually starts with seed money you provide from your own savings. Outside investors are not used.
Once the business runs, you start to earn money from sales, which you pump back into the business. Bootstrapping is about minimalism and doing as much as you can yourself. Lots of bootstrappers start without employees, wearing all hats in the company.
This method has benefits and drawbacks, of course. According to Edgar Radjabli, managing partner of Loan Doctor, "The main benefit of bootstrapping is that the founders keep more equity and control of the business."
A downside is that you may be tight on cash and resources.
Danielle Roberts started insurance agency Boomer Benefits with her brother and relied mainly on sweat equity to get it going. The choice to bootstrap meant they had to downsize their lives and pour their profits into the agency.
Matthew Ross, co-owner of mattress review site My Slumber Yard, started with a small amount of seed funding from family and friends but bootstrapped the rest. "A business that is bootstrapped generally doesn't have the resources to launch big marketing campaigns or to hire additional salespeople," he says, and that means slower growth.
Bootstrapping requires you to think creatively to get the cash and resources you need to launch your business. Consider the following techniques.
Equity financing raises capital by selling ownership shares. Cairns notes that you will need to show a value for your business to access equity financing or show widely acceptable comps—companies in that sector that have been successfully sold.
Ross explains that equity financing doesn't have to mean involving strangers. "A lot of times friends or wealthy relatives will give you a loan or invest in the business for a small piece of equity," he says. "These types of arrangements are often preferable since there are fewer headaches, paperwork, and personal risk."
Equity financing has the benefit of funding your business upfront. "An equity investment gives the business more resources to grow," Ross says. "The company can hire more employees, launch marketing campaigns, launch new products, invest in infrastructure, increase manufacturing capacity, etc. Businesses may also benefit from the knowledge and expertise that the new investors provide."
The major drawback of equity financing is that you are no longer the sole owner of your business. Calloway Cook, president of Illuminate Labs, says: "I decided to take equity financing to reduce personal financial risk. The benefit of removing all personal financial liability from launching a business outweighed the drawbacks of giving away a percentage of ownership and waiting months for all the legal documents to be completed and the investment money to clear."
"Carefully consider your investors and their respective personalities," Cook cautions. "If these are people who are going to hound you and add stress to your workdays, it may not be worth it. I would recommend getting investment from people you know personally if you have the network to do so, as you can judge their character better than an investor you just met."
Although Neal has bootstrapped much of his business, he did take equity financing from a former employer. Once was enough for him, though. "Our ownership has been diluted, and we now have an investor who we are legally obligated to work for, in his best interest," he explains. "And sometimes trying to secure profits for an investor is counter-intuitive to trying to grow and gain market share."
It's important to consider which method works best for your business. "If your growth expectations are modest, needs are short-term, etc., the non-equity methods are preferable," Cairns says.
Radjabli has both bootstrapped and equity-financed different companies. "Bootstrapping is usually best when the addressable market is small or niche, such that there is a limitation on how large the valuation of the company can grow," he says.
"Once you've exhausted the bootstrapping and have a clear plan that needs funding, that's when you should pursue equity financing," Neal says.
Bootstrapping and equity financing are both paths to business success. Choosing the one you are most comfortable with allows you to grow your business with confidence.
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