Starting A Business: Funding Or Bootstrap?

When it comes to starting a business, there are always going to be big decisions that have to be made, and one of those decisions that you’ll face right from the start is going to be whether to get your business off the ground through funding it, or by spending the time and bootstrapping everything if you don’t really have the financial means to fund it yourself.

Whilst bootstrapping your business is definitely something that has its benefits, especially if you’re not able to get things like bank loans, guarantor loans from a direct lender, or even don’t quite feel comfortable throwing your savings into your new business venture, it’s also something that’s going to take you a good bit longer to get your business off the ground, and this can mean that if you’re still working a full-time job, then you could be basically working around the clock.

As for the advantages of bootstrapping, here are just a few of them:

  • You’ll save money: most business owners who go with the bootstrapping option do so usually because they either don’t want to or aren’t able to spend the money needed to get things going, so although you’ll definitely spend a lot of time working on your business, you’re also going to save money;

  • You’ll learn about the different parts of your business: businesses have many moving parts to them, and if you’re hiring someone to do these things right off the bat, then you’re not giving yourself the opportunity to learn all about what really goes into building a business, and this is certainly useful knowledge to have;

  • You’ll be able to step in if needed: probably one of the best things that you could ever get from bootstrapping your business is that due to you learning about all the moving parts as mentioned above, this means that when you are able to hire people to manage the different parts, you can still step in and take over things - for example if your web developer is off sick, then you can make any tweaks or fixes because you’ve learned how to do all these things.

However, there are other options for your business that don’t involve getting yourself into debt or working 18 hour days, and that is applying for funding for your business. There are different types of funding available for business owners, but for the purpose of this post we’re going to focus on the two main ones that are most common and popular right now.

To ensure you understand which option best suits you, we’re firstly going to explain the differences between the two, and the pros and cons of each.

Debt Crowdfunding

P2P lending is loosely based on the more traditional lending model, but without the need for banks to be involved.

How this works is, once someone has chosen where to invest, they would give the money as a loan to an individual (peer) or company, they would set the terms of the loan to be mutually agreed upon, including how/when the investment will be paid back, and how much interest will be paid to them

Advantages & Disadvantages:

The individual or company to whom the money has been lent is required to ensure that the investment plus interest is paid back to the investor before they can deduct any profit, so whilst debt lending offers a low risk investment, it also yields a low return, with the average annual interest ranging between 5% - 9%.

Equity Crowdfunding

Using this investment model, someone would invest their money into your company or project if you’re looking to bring on investors to help fuel your growth.

In exchange for their investment, they will be offered shares or a stake in the company or project, and will make their return on investment through dividends, profits and shares.

Advantages & Disadvantages:

Unlike Peer-to-Peer lending, Equity Crowdfunding offers a much higher return, but that also comes with a higher risk, as the success of the company or project will determine how much they get back - whereas with the Debt Lending model, they’re simply offering a loan that has to be paid back regardless of whether you make a profit or not, so these are definitely things to take into consideration when choosing the funding model that best suits you, and also ensuring that your company you’re asking people to invest in is expected to be a success.

The average annual returns for Equity Crowdfunding are typically seen to be in the region of 8% - 15%.

Hopefully this article has helped provide you with a better understanding of these two funding options and allowed you to determine which may be the better fit for you when learning how to look for the best ways to fund the growth of your business.

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