To Borrow or To Bootstrap: When to Finance your Startup

By Megan B. Shepherd

Many entrepreneurs are at the beginning stages of starting and running a business of their own. According to Finder’s Consumer Confidence Index, a whopping 46% of respondents who own a business started their venture within the last year, and another 28% are gearing up to launch in the coming year.

One of the first hurdles business owners face is how to fund their startup. There are times when it makes sense to rely on your own resources or when getting a business loan may be the right choice. In many cases, you’ll need both.

When it makes sense to take out a startup loan

A business loan makes sense when your business is ready to grow, but you don’t have the funds to act on opportunities. Taking out a startup loan offers quick access to capital, with the best online business loans putting cash in your hand in as little as a day or two. Business loans can be used to fund rapid growth, invest in technology, hire essential employees, seize market opportunities and more. 

If your business is in a significant growth stage or requires substantial initial investment to scale, such as equipment, infrastructure or technology, a startup loan is a lifeline that could position your business for long-term success. The benefits of getting your business off the ground quickly often outweigh the disadvantages of taking on debt, as it puts you in a position to generate revenue sooner. 

Pros and cons of startup financing

Pros

1. Quick access to capital. Perhaps the most significant advantage of getting a business loan is the near-immediate access to capital. An infusion of funds can be vital for covering initial expenses that can keep your business running in the right direction.
2. Scalability. Borrowing enables you to capitalize on emerging opportunities and respond to market demands swiftly. A loan offers the cash it takes to keep up with rapid growth.
3. Separation of personal and business finances. Taking out a business loan helps separate your personal finances from your business’s financial operations, which could be essential for accurate accounting and reporting.

Cons

1. Debt repayments. The main drawback is your obligation to repay your business loan on time. Loan repayments can strain your cash flow, especially if your business doesn’t perform as expected. However, longer-term business loans may offer lower interest rates and lower monthly repayments.
2. Accruing interest. The cost of borrowing includes interest. Interest accumulates over time, making your loan’s total cost higher than the amount you initially borrowed.
3. Must meet eligibility requirements. Most startup loans require a specified time in business, monthly revenue requirements, minimum credit score requirements and more. However, some lenders — typically online — offer more flexible minimum requirements.

When to rely on bootstrapping your startup 

Bootstrapping is a financing strategy where you rely solely on your personal savings and any business revenue to fund your startup. If you’re all about full control, this financial strategy ensures you won’t need to answer to any outside investors or meet critical payment deadlines as your business grows. It also reduces the financial risk of accumulating debt and accruing interest on a loan.

Bootstrapping offers several advantages and could be the right choice If you have enough savings or revenue to kick-start your business. But, if you don’t have the cash or don’t like the idea of slow growth, you may be better off trying to secure a business loan. 

Pros and cons of bootstrapping

Pros

1. Full control. Relying only on your money to fund your business means you maintain full control over your business and how your money is used. No answering to investors or banks.
2. Minimize debt. If you aren’t taking out a loan to fund your startup, you won’t accumulate any debt or interest. Plus, you’ll ditch the pressure to make regular loan repayments while building your business.
3. Sustainability. Bootstrapping often means slow and steady growth. You’re forced to prioritize profitability from the outset. Many bootstrappers claim the focus on financial sustainability at the beginning led to long-term success.

Cons

1. Limited resources. Naturally, if you’re constrained to your savings and what your business can generate, you’ll likely have fewer resources than taking out a large loan with access to cash all at once. Less cash on hand could mean missing out on lucrative opportunities.
2. Slow growth. With only the reliance on your savings and what your business can generate, you’ll have limited resources at your disposal. This could mean a longer time to market and slower expansion, making it much harder to scale your business quickly.
3. Personal risk. Your personal finances are at stake when you sink all your savings and revenue into the business. If your business encounters financial difficulties, your assets could be on the line. 

How to balance bootstrapping and business loans 

Finding the balance between bootstrapping and taking out a business loan can be a winning strategy for your startup. This allows you to leverage your own resources while taking advantage of external capital when necessary. 

Consider using loans to fund growth initiatives, such as expanding your product line or investing in marketing and advertising, while bootstrapping your daily operations. Whether to bootstrap, borrow or both comes down to your business goals, available resources and risk tolerance.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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