Capital Raise versus Bootstrapping: What’s Right for Your Business?
BY: MEGAN TOTKA ON THURSDAY, JANUARY 19, 2017
Landing or finding the right funding for your business takes more than wishful thinking. As an entrepreneur, it’s up to you to find the right new business funding strategy for your specific needs. But where do you even start looking?
New business funding models are divided into two categories: capital raises and bootstrapping. A capital raise, as the name implies, is all about finding ways to fund your business idea. Bootstrapping avoids funding routes like loans or credit, and relies on the revenue from your business to keep it propelling forward indefinitely.
So which one is the right fit for you? Let’s take a closer look at both.
If your business needs thousands or even millions to get off the ground, you will likely need to seek out investors – whether they be venture capitalists, traditional banks or other sources. Here are some of the ways to raise capital for a new business:
·Banks – Traditionally, if an entrepreneur needed a loan, he or she would have to fill out the proper paper work and wait to hear back from a big-name lender. While it’s not the only choice anymore, landing funding from a bank has its perks (often in the name of low-interest rates for those who qualify). If your business plan is solid and you have an excellent credit score and history, a traditional bank loan for your new business may be the best bet.
·Online loan platforms – The rise of online loan origination platforms is a big benefit to entrepreneurs. These sites specialize in connecting investors with businesses that meet their portfolio needs or interests. LendGenius reports that since going online three months ago, over 20,000 business owners have submitted a loan application. There is a market for funding new businesses and online loan platforms can help connect the right parties.
·Crowdfunding – Also online, these non-traditional lending platforms connect real people with real investments opportunities, often for much less of an investment. The power of these sites is in the numbers. In 2015, $34 billion was raised worldwide through crowdfunding. It’s so popular, though, that you may have a hard time standing out from the rest of the ideas looking for funding.
If you don’t want to take out a loan, or have to answer to investors when it comes to your new business, bootstrapping is an attractive option. You spend the money you make in order to keep your business afloat and growing. This is a reasonable option for businesses that don’t need a lot of inventory or other startup costs. It is a lot more pressure to make money, and make it immediately, than going the capital raise route.
Bootstrapping adds another large responsibility to the business owner’s shoulders – funding. In all new business situations, revenue is an important element but it’s an end-all-or-be-all when bootstrapping is implemented. One bad week or month, and a new business can go under. Entrepreneurs who rely on bootstrapping as a new business strategy must be prepared to work on a shoestring budget, often for several years.
So what’s the right funding source for your new business? The answer may be listed here, or consist of a combination. Figure out what makes the most sense based on your estimate return on investment and then research where to find that funding.
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