Bootstrapping vs Equity Funding: What You Should Know

Entrepreneurs face a lot of hurdles in their quest to launch and run their businesses. One particular hurdle stands out from the rest. Funding. This is the most critical part of any startup. However, entrepreneurs have a number of options at their disposal.

You can choose from business loans, grants, personal credit loans or using your savings. While many options exist, equity funding and bootstrapping seem to attract a number of business owners.

Nevertheless, these two funding options come with their own fair share of challenges and advantages. If you have dreams of starting or expanding your business, take a look at what you should know about these two options.

What is Bootstrapping?

Bootstrapping involves channeling your funds into the startup. If it’s already up and running, you can use the revenues to plan for expansion. Therefore, the owner doesn’t seek outside funding.

In this form of funding, the owner maintains complete freedom when making business decisions. All the focus is on the success of the business, free of external influence from investors who might have varying visions. By funding your business, you become more attached and will do anything to see it soar.

This includes coming up with innovative ways to increase efficiency and productivity.

Pros of Bootstrapping

  •    You Keep 100 Percent of the Equity

Since all funding is from your personal pocket and business revenues, there’s no need to take on debt from any outside investor. This means you have 100 percent control of the business. It may require sleepless nights and numerous frustrations, but the joy of seeing your business take off is worth it in the long run.

  •    Bootstrapping Allows You to Discover Other Capabilities

This is, by far, the biggest benefit of bootstrapping. Discovering what else you’re capable of allows you and the business to grow. If the business isn’t a partnership, chances are you’ll start off alone as a single employee.

This forces you to take on tasks you might not have any background knowledge in. for example, if you bake, you’ll have to do the baking and deliveries alone before you get enough money to hire a delivery guy. On top of that, you’ll have to market the business and do bookkeeping.

After your business is all grown, you’ll be proud of the baby steps in the beginning.

The Cons of Bootstrapping

Bootstrapping requires tenacity and a lot of willpower. Without these, your business will fall before it takes off. If you have no passion for the business, you’ll face a lot of difficulties, especially with budgeting and forging ahead after a turbulent period.

  •    The Future is Unclear

While starting any business is a big risk, doing so without external funding is riskier. You have no idea what the future holds for your business with empty pockets. In addition, you cannot be 100 percent sure your hard work will bear any fruits.

Is Bootstrapping Worth It?

This will depend on your current financial situation. If you don’t have enough money in savings, you might want to stay away from bootstrapping. Instead, apply for a business grant rather than a nation21 loans. However, keep in mind you’ll need to satisfy certain criteria to qualify.

Nevertheless, if you land the money, you won’t have to pay it back. This will give you the much-needed funding while also allowing you to maintain total control of your business.

Equity Funding

On the other hand, equity funding involves investors injecting some funds into your business. The investors come in the form of venture capitalists and angel investors. Often, these investors will ask for equity in exchange for the investment.

Pros of Equity Funding

  •    Faster Business Growth

With ready money, you can expand the business without having to worry about funding. This includes acquiring a new location, hiring more employees and buying machinery necessary for service delivery.

  •    You’ll Never Lack Funds

Equity funding will seal all funding needs in the business. As a business owner, your main objective is coming up with solutions to customers’ problems. Be eliminating funding from your list of worries, you’ll focus more on service delivery, thus allowing the business to grow.

  •    Additional Knowledge

In many scenarios, the investors who provide equity funding to businesses are experienced entrepreneurs. After injecting funds into your business, they become interested in it. As a result, they’ll bring in industry knowledge into the business which will allow you to have a head start in entrepreneurship.

Cons of Equity Funding

  1.    You Risk Losing Control of Your Business

Investors will offer business funding, but in exchange, they’ll want a stake in the business. This can be in form of equity position or company shares. This stake allows the investor to take an active role in the company.

This means you’ll no longer remain the boss. Before taking any critical decisions, you’ll have to involve the investor. At first, this might not be a big deal, but as you grow, this might be a hindrance.

Is Equity Funding Worth it?

To help you make an informed decision, consider the long-term vision you have for the business. Does it align with that of the investor? Also, how good are you as a leader? Can you accommodate another “boss” in the business? If not, it’s better to stay away from investor funding.

Each business is unique in its own way. Therefore, what might work for one might be toxic for another. Whichever form of funding you’ll choose, you need to be aware of the pros and cons associated with each.

If you decide to settle for equity funding, ensure you make a wise choice. The investor will guide you through your entrepreneurship journey including the vision, direction and strategy to achieve set goals.

If you choose to bootstrap, make sure you understand what it means to go at it alone. in fact, before you do, seek the services of a financial advisor to help you decide whether bootstrapping is good for the business.

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