The conundrum of whether to bootstrap or business loan your way to a startup is an important decision a lot of new business owners come head to head with. The truth is there is no straight answer to provide you with. However, there are pros and cons for each which can help you to reach an informed decision on how you will fund your new company.
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The Bootstrapping Method
Bootstrapping is the art of using the money that has derived as a result of your startup business and then using this to invest back into the business. The bootstrapping method is mainly used by people where the below pros apply:
- Those who don’t have a lot of money in savings or backing them to launch their business.
- Some prefer the idea of using the money they earn from their business in a bid not to take on debt by borrowing money from the bank or a company.
- If you have a poor credit rating and are unable to obtain a loan bootstrapping may be your only option right now.
- Or those who believe their financial forecast should reap them enough profit to cover the expenses. As well as provide them with extra cash to help their business grow.
However, there are a few cons to consider before you decide on the bootstrapping method:
- By depending solely on the income made by the business you are strictly limited growth wise, as you can only grow as big as your business income allows.
- A lot of companies after purchasing equipment, staff, and premises won’t forecast to break even until 12 months or over. This means a long time before you can invest money back into your sales and marketing departments which are the areas which will help the business grow.
- Restricting the company in this way in the first few months to a year of its launch could have damaging effects on the businesses success.
- The bootstrapping technique may prevent you from being able to either outsource or hire people to do jobs outside of your expertise.
The Business Loan
In comparison to the bootstrapping method, you may decide to get a business loan can provide you with the funds you’ve forecasted to need in the first year or more of your startup. Below are the business pros and cons to consider to assess whether they can suit your company needs. You should contemplate a loan for your start-up if;
- You don’t have the necessary savings to launch your business or to cover the cost of expenses for the first year.
- If you have a reasonably good credit score, depending on the company or bank you choose to borrow from, and the amount of money you borrow (usually borrowing more, means a lower interest rate), you could be offered an affordable interest rate which will be easier to repay.
- Once you’ve surveyed your options for a business loan, the typical interest rates, the date and the term you would need to repay the loan, providing you can meet this criteria and afford repayments, this may be a good option for you.
- Rather than spending months or years saving to begin your business venture, with a loan approved (which can take anything from a few days to a few weeks) you could be able to launch your business a lot sooner than expected.
A few cons to consider are:
- Missing payments could be detrimental to your credit score.
- Depending on the agreed liability when applying and accepting the loan, should you be unable to afford to repay this it could mean the assets from your business are taken away.
As an alternative, you are not restricted to just bootstrapping or a business loan, as you could adopt a combination of the two. Other forms of funding to consider to launch your venture are to seek grants and bursaries from the government website or consult other credit options, such as a credit card or maybe an overdraft.