It May Be Time to Rethink Bootstrapping

Entrepreneur considering his financial strategy.

Is bootstrapping right for your business?

Many entrepreneurs finance business ventures with their own money by taking out mortgages on homes, reinvesting profits back into companies, and managing money carefully, taking no unnecessary risks.

This approach may sound safe, but it may not be the best way to grow your business.

Even if you have a pretty successful business model that’s been making you consistent profits for a few years, your bootstrapped business is vulnerable to certain risks that can impede its financial security.

Here are a few things to think about when considering whether to stretch beyond bootstrapping.

Funded businesses may be more successful

A research study (published in the Journal of Corporate Finance) found that borrowing outside money is advantageous to business success, especially for startups. The findings represent the work of finance professors Rebel Cole of Florida Atlantic University and Tatyana Sokolyk of Brock University in Ontario.

According to their findings, businesses using outside funding generated four times the profits after three years compared to those financed by self-funding. Additionally, companies with outside financing were also more likely to survive after those first three years of business.

Not only can financing help a startup survive in its early stages, but it’s also helpful to seasoned businesses who want a financial edge over their competitors. Extra funding opens the doorway to funding growth strategies and has the potential to bring skilled investors to the table.

Investors want your business to thrive

“Enrolling others with a vested interest in your success can bring top-level help,” says Alejandro Cremades, co-founder at Panthera Advisors. “It can put board members, shareholders, influencers, and big deal makers with the keys to sizable sales channels in your corner and going to bat for you.”

This involvement can be a good thing or a bad thing. Bad mentoring can hurt a business, but it’s pretty easy to avoid if you take a serious interest in finding an investor whose expectations and vision for your business align with yours.

Taking on an investor can be a real “perk,” says Bryan Watson, partner with Toronto-based consulting and venture services firm Flow Ventures. They often bring valuable input and connections. “But it is a relationship, so you have to look for the right fit for your company.”

Finding the right investor takes a little time, but the benefits can be wide-ranging. One of the most important benefits of obtaining outside financing is the opportunity to build credit.

Businesses need to build credit

Building credit is something many businesses neglect to do. Credit is a crucial barometer for lenders in deciding whether to finance a given business. Because of this, businesses without strong credit are at a disadvantage.

In fact, many businesses “identify a lack of finance as a major reason for leaving [their] business,” according to the 2016 Global Entrepreneurship Monitor report. This potential shortfall is why having good credit is crucial. In times when finances get tight or unexpected costs appear, a strong credit score makes it much easier to get approved for necessary financing.

An additional benefit of building business credit is the ability to take out a loan in the name of the business instead of putting personal credit on the line. You just never know when financing could come in and save the day, so strong credit is a safety net worth building.

Consider financing your growth

Personal finance website RateHub recently raised its first round of investor capital after 7 years of bootstrapping. When asked why, founder Alyssa Furtado said, “We stumbled on insurance comparisons and we knew it could be a multimillion-dollar business—but we had zero excess capacity.”

If you are unable to scale your business because of a lack of capital, outside investment can be a good option. Older businesses have the added benefit of long-standing success to show investors. They are more likely to attract investment because they have a concept with a proven track record.

As shown in Furtado’s example, an investor buying into that concept is the foundation of a strong relationship—one that can help your business grow when and if you leave your bootstrapping days behind.

Leaving bootstrapping behind

Bootstrapping business owners have to do a lot more hustling to get their ideas off the ground. That means working more hours and managing more roles with a smaller budget to make crucial growth decisions.

Many independent business owners take a well-earned and special pride in being the sole owner of an entirely self-funded company. That feeling is understandable, but remaining self-funded is often not the best long term plan. Think about what your business could do with some more capital behind it: the growth potential, hiring potential, equipment purchases.

All these things cost money that you may not have. If so, it’s worth taking some time to examine potential investors and lenders. After all, nothing says growth like extra money in your bank account.

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Tags: Business GrowthFinancing