If you’re looking for ways to finance your small business, you’re in the right place. Here, we’ll be discussing 3 ways to finance your small business, and I’ll be sharing with you the one option I recommend most and why.
You have a business concept or you may have begun to implement a business strategy. You have your normal personal expenses: water, electric, food, transportation, shelter, and so on. Now, you have this new idea (or the beginning of this business) and it’s starting to need start up business funding, but where do you get that from?
- 1 The Mainstream Advice on Start up Business Funding
- 2 The Cons of Business Loans
- 3 My Experience With Loans and Debt
- 4 Added Cons of Business Loans
- 5 The Cons of Equity Financing
- 6 What is Bootstrapping and How Does it Count as Start up Funding?
- 7 Are Bootstrapping Entrepreneurs with a Small Budget at a Disadvantage if they are solely providing their Start up Funding?
- 8 Warnings for Bootstrapping Entrepreneurs with A Big Budget for their Start up Funding
- 9 What does Economic Outpatient Care, Spoiled Children, and Borrowing Business Owners Have in Common?
- 10 The Benefits of Bootstrapping For Proof of Concept
- 11 The Cons of Bootstrapping
- 12 My Bootstrapping Experience
- 13 Warnings for my Fellow Bootstrapper
- 14 The Benefits of Bootstrapping for Financial Confidence
- 15 Final Words on these 3 Ways to Finance Your Small Business
- 16 Let’s Open the Floor For Comments, Questions, and Concerns
The Mainstream Advice on Start up Business Funding
Many mainstream resources talking about start up business funding will begin prepping you for a business loan. They tell you that you need to start “building business credit”. They tell you to get a secured credit card, buy materials or equipment with in-house credit somewhere, or establish credibility, so you can get a loan.
Alternatively, some mainstream advisors have you thinking about pitching investors. I mean Silicon Valley is booming, right? You may think to yourself, “All I have to do is get someone to begin making a business plan (which I talk about here), learn how to set up a website for business and sales (which I talk about here), create a pitch deck, and begin pitching investors, then….BOOM…I have my start up business funding, right?” But, then, you find out getting start up business funding the loan route and the investor route has its cons.
The Cons of Business Loans
You’re starting your business so you can have more freedom, right? When you have debt or someone you have to gain consent from before making decisions in your business, then do you truly have more freedom? I think not.
With business loans, you get a bill in the mail every month. The lender doesn’t care that your business didn’t have the expected revenue or sales. They only care that they gave you the start up business funding when you asked for it, and they want their payments on time. When you’re starting or growing a business, you have to do several experiments to see what works. When you have the pressure of owing someone at the very beginning, sometimes, it can push you into making decisions out of desperation rather than because the decision is best.
My Experience With Loans and Debt
I never acquired debt for my business ventures, but I have gotten debt for personal purchases. I remember when I made my first furniture purchases. I was a single mom making enlisted Airman pay. I wanted to have a good standard of living for my son, so I talked myself into using in-store credit to get my furniture. I picked furniture I really liked, and got it delivered to my house. Everything seemed great until the bills came rolling in, and life circumstances took their course.
I had the pressure of covering the debt payments regardless of my financial issue. It was a lot of pressure, and I thank God I paid those furniture loans off! I had more debt agreements I made in my 20’s before I decided debt is just not a good fit for me, and I would love to relieve you of that pressure.
You can make the best decisions for your business and your customers when you’re business is free of debt. When you’re worried about making debt payments on time, you can be strongly tempted to act in desperation rather than making the most logical and long-term decisions.
Added Cons of Business Loans
The ideal setup for business loans is you have a lender who has money, he exchanges it with a person who needs money, and the person pays them back in full. Unfortunately, while you may be very optimistic about the business potential, hiccups come.
You may try rolling out a new product line that just flops or attracting a new target audience that doesn’t catch on. Things happen! The business loan arrangement has no sympathy for your circumstances. The reality of the lender/borrower relationship can have very negative emotional pressures, so I think it’s a method of start up business funding you should avoid.
Added onto the norms, sometimes, interest rates will rise, the economy will change, lenders will change their terms of service, and payments will adjust. As a startup entrepreneur (or one scaling their business), you need to be able to focus on strategy and implementation. Worrying about loan repayment can be a huge distraction!
The Cons of Equity Financing
I WAS so attracted to equity financing as a beginning entrepreneur. I was attracted to the mainstream view of equity financing you see on places like Shark Tank. It looks like the entrepreneurs who pitch and investor and get a deal have a mentor for life, and they have access to an expanded network. It looked like bliss to me until I dug deeper.
In their article called The Pros and Cons of Equity Financing, the author talks about how you loose ownership of your business. If you decide you need to take a vacation or you need a BMW to meet with clients, guess what? You have to accept the investors input on that. You’re starting this business for increased freedom, right?
Most of us, entrepreneurs are in business for freedom, flexibility, and control of our destinies, right? Having an investor can be very similar to having a 9 to 5 boss.
- You have to be accountable to them
- You have to explain the ups and downs of the business and submit to their input
- You have to compromise things you may consider in the best interest of the business you desired to run
What is Bootstrapping and How Does it Count as Start up Funding?
Bootstrapping is using your own money to start and grow your business. Bootstrapping requires the most creativity of all start up funding options because you may start with $5, $100, or $10,000 you can invest towards your business. Each see investment amount comes with its individual pros and cons.
Are Bootstrapping Entrepreneurs with a Small Budget at a Disadvantage if they are solely providing their Start up Funding?
Startup entrepreneurs with a small budget often feel that they’re at a disadvantage, but those with large budgets are at a disadvantage also. I love listening to Daymond John and Mark Cuban talk about the power of broke. Like them, I believe there is power in starting with a small budget because of how much it increases your creativity. In his book, The Power of Broke, Daymond John talked about how much more cautious you are when: (1) It’s your money, and (2) You don’t have a lot of it. You tend to be much more careful with a smaller budget.
Warnings for Bootstrapping Entrepreneurs with A Big Budget for their Start up Funding
Thomas Stanley speaks about the detrimental mentality of those who have a big budget in his book The Millionaire Next Door. I recommend you checking out his book whether you have a big or small budget because it will help you to create the necessary mindset and habits to partake in the bootstrapping journey. Any form of start up business funding has its challenges, but bootstrapping is definitely not for the faint at heart!
What does Economic Outpatient Care, Spoiled Children, and Borrowing Business Owners Have in Common?
Haven’t you seen the spoiled child? The one that knows there’s no consequence for their behavior? The spoiled child knows their parents will take the brunt of the consequences, so they can “do what they want” for the most part. This “spoiled child” syndrome can translate into financial dependence and Thomas Stanley calls these dependent people recipients of “economic outpatient care”.
Business owners who begin with loans or equity financing (especially if they acquire them prior to a strong proof of concept), find themselves demonstrating the same unhealthy behavior patterns as the “spoiled child”. They may not ever learn how to balance their business tasks with the correlating sales/revenue outcomes. When a business owner stays in the cycle of recruiting for funding rounds because they’re not able to creatively plan, then you build huge behemoths of businesses that eventually need bailouts and so on. Don’t build a business that always relies on economic outpatient care!
The Benefits of Bootstrapping For Proof of Concept
While bootstrapping may not be the easiest option for a startup entrepreneur (or some may say), it pays off with freedom and liberty once the cashflow starts rolling in. Unless you go public (which typically means you have shareholders and you’re using equity financing), you won’t have to consent with so many parties before making business decisions. You can hire consultants (like me) to give you more input on your business, but you ultimately choose what you’re going to do. There’s so much liberty in being able to make your business choices without a mega hierarchy or something of such. You won’t have the pressure of debt invoices coming in, and requiring payment.
Bootstrapping also gives you a chance to try the venture out without feeling obligated to stick with something if you find out you don’t like it. Proof of concept is a must! With bootstrapping, you can prove whether the idea you had works in the market and whether you like working it in the market. You want verified proof that the market has a demand for your product/service, and you want proof that you’ll enjoy being the solution. When you let lenders and investors come in too early, you can get stuck in a field you may not like because you feel obligated.
The Cons of Bootstrapping
Bootstrapping requires lifestyle changes (especially if you are starting with a small budget). You may have to be creative about how to cut your grocery budget, you may need to increase your savings rate or begin investing, you will be the only one that concerns themselves with your financial independence or retirement, so you will have to check into good investment firms. Do you get the picture? You become the captain of your own ship and the pilot of your destiny as a bootstrapper.
My Bootstrapping Experience
The lifestyle change part can be hard because you have to create new habits. I’ve done lots of things to cut my expenses and increase my savings and investing rate. Things like:
- Freezer cooking – batch preparing meals to cut waste, save time, and increase meal prep speed
- I’ve replaced disposables with cloth (wherever possible)
- I got serious about meal planning or hiring it out for as low as $5.00! (you can read more on that here)
- I’ve had Billcutterz (a third party bill negotiator) negotiate my bills down
- I’ve side hustled like nobody’s business and I wrote about quite a few here
- I’ve attended online classes like this one on making over the grocery budget
- and, I’ve made sure to get better and better at sales
I’ve done many things so I can take expenses down, increase my sales, and leave room for investment into my business ventures (even if the investment amount seemed minimal). It’s important that regardless of what budget you start with that you’re mindful that it’s finite. Contrary to popular belief, I believe it’s good to place yourself in a scarcity mentality while you’re starting your business, so you are not overspending on all of the gadgets that can supposedly help you. When your expenses are intact, you can invest more in start up business funding.
Warnings for my Fellow Bootstrapper
Gadgets will come out the wazoo that do this and that, whether payroll or time management, or else. The scarcity mentality that you maintain should be connected to your budget, which should show you the finite limits of what you have (big or small). Regardless of what budget you have, you should be intentional, so track your spending and be careful you’re balancing outgoing expenses with incoming revenue as best you can.
While bootstrapping, you have to increase how you track expenses. You can use something like Personal Capital to help you track your net worth in your business and personal ventures. This will help you visualize whether you are growing or shrinking in financial health. It’s such a fine line between profiting and loosing when you’re first starting out, so apps that help you save like the digit app or apps that help you track your budget and net worth like personal capital can be your best friends in this journey.
The Benefits of Bootstrapping for Financial Confidence
There is a confidence you accrue when you know (without the shadow of a doubt) that the ideas in your mind can grow money. When you know you can take $5 and turn it into $100, $1000, $10000, or more, you sleep better at night.
Many financial independence enthusiasts gain their security from their bank accounts. They may have one million dollars or more that makes them feel like they are worry free.
In reality, currencies change (which is rare but it happens), economies go up and down, marriages can get ugly, people steal, natural disasters happen, medical bills are high and people get sick, and so many other scenarios can chisel away at the bank account that delivers financial security.
Once you’ve mastered bootstrapping for start up business funding, you can have the confidence that if everything was to be taken away, you can create ideas (by God’s grace) that enable you to re-create what you’ve lost. Financial confidence stumps financial independence any day in my book, and bootstrapping helps to build the creativity and problem solving skills necessary to build financial confidence.
If you never have to start with nothing, how do you create the confidence that you’ll be okay if you ever have to?
Final Words on these 3 Ways to Finance Your Small Business
If you’re serious about bootstrapping for start up business funding, it’s a journey, and you need all the tools resources, knowledge, and support you can get to make it successful. It’s like loosing weight, getting out of debt, or other challenging journeys people choose.
Bootstrapping is a character-building journey that adds admiration in your story. You’ll love all these resources to fuel you in this journey because they’ll help you track your expenses, and help get your wheels turning towards financial confidence. You’ll thank me later!
Additional Recommended Resources:
If you’re interested in small business financing, then it’s likely, you may want to take a look at these other options as well:
- How to Budget and Save Money for Business
- The Dave Ramsey Budget for Business
- My Free E-Course to Grow your Business: From Idea to Enterprise
Let’s Open the Floor For Comments, Questions, and Concerns
I know that was ALOT of information. As always…you get your turn to say what you need to say…
Have you used business loans for start up business funding? Have you pitched investors or known someone who has equity funding? What are your thoughts on bootstrapping and start up business funding?