Starting and growing a small business requires capital. Without sufficient funds, it’s challenging to bring your vision to life and stay competitive in the market. Financing is one of the most critical aspects of running a successful small business. While some entrepreneurs might have enough savings or personal resources to start their businesses, most will require external funding at some point.
That’s exactly why we consulted our friend from Money Zap, Frank Glemstone. In that light, we’ll go over some crucial things you need to know to borrow money and how to handle it. Let’s get down to business.
Bootstrapping as a Starting Point
Bootstrapping is a financing method where entrepreneurs fund their businesses using their savings, personal credit, or revenue from the business. This approach enables entrepreneurs to retain complete control of their business and avoid the drawbacks of external funding, such as high-interest rates, equity dilution, and debt repayments.
Here are some benefits of bootstrapping:
- Retain control: Bootstrapping allows entrepreneurs to maintain control of their business without diluting equity or taking on debt.
- Agility: Without external investors, entrepreneurs can make quick decisions and pivot their business model to adapt to changing market conditions.
- Cost-saving: By using personal funds, entrepreneurs can avoid paying interest on loans, equity shares, or other financing costs.
- Builds resilience: Bootstrapping requires entrepreneurs to be resourceful and creative, which can lead to better problem-solving skills and long-term resilience.
Consider Loans as a Way of Funding
Loans are a popular financing option for small businesses, providing access to capital to invest in the business, hire employees, or purchase inventory. A loan is a sum of money borrowed from a bank, credit union, or online lender that must be repaid over time, typically with interest.
Here are some tips for securing a loan:
- Know your credit score: Lenders will review your credit score to determine if you’re a good candidate for a loan. Therefore, it’s essential to know your credit score and address any issues that could impact your ability to secure a loan.
- Have a solid business plan: A strong business plan demonstrates to lenders that you have a clear vision and strategy for your business, making you a more attractive borrower.
- Shop around for lenders: Different lenders offer different loan products and interest rates. Therefore, it’s essential to shop around for lenders to find the best loan product that meets your needs.
- Prepare financial documents: Lenders will require financial documents, such as tax returns, bank statements, and financial statements, to assess your eligibility for a loan. It’s essential to have these documents prepared in advance to speed up the loan application process.
Taking out a loan can be a significant financial commitment, and it’s essential to weigh the pros and cons before borrowing.
Venture Capitalists
For those who didn’t know, Venture capitalists (VCs) are investors who provide funding to startups and early-stage businesses in exchange for equity in the company. VCs typically invest in high-growth industries, such as technology and biotech, and seek to exit their investment within three to seven years, typically through a merger or acquisition or an initial public offering (IPO).
With that in mind, venture capitalists can provide substantial funding and industry expertise to help startups scale their businesses. However, working with VCs also comes with significant trade-offs, and it’s essential to carefully consider the pros and cons before seeking funding.