Small business loan vs. bootstrapping

There are a few ways to help pay for your startup in its early days before revenue starts coming in. But should you pay your own way or get a loan?

If you are starting a small business, you’ve got a few options when it comes to financing. If you’ve got enough saved, you can bootstrap the business and pay your own expenses until revenue starts coming in. If money is tight, or you want to otherwise conserve your cash, you might be better off taking out a small business loan.

Bootstrap the Biz

If you have the money, bootstrapping may be the better option. You won’t owe anyone money and you won’t have to share equity with anyone. You have full control. But that might not be what you need. You may do better to share the responsibility (operational and financial) with someone else to reduce your risk.

If you bootstrap, it’s key to keep your costs down. Don’t create unnecessary expenses. If you can work out of your home, do so until it becomes difficult. Handle the work yourself or hire an intern until you can afford a full time staff. Even use both sides of the paper when printing! It seems like a small thing, but if you’re paying your business expenses, you’ll find the little things add up quickly.

Here are a few other bootstrapping techniques:

  • Leverage Equity: If you need a partner, employees or vendors but lack the cash, consider offering equity in your company in exchange for what you need. People that truly believe in your business will take you up on the chance for a part of your business.
  • Business Partner: Sharing the company with one or more partners can help take the pressure off your checkbook, and give you someone to bounce ideas off of.
  • Deferred Payment: If vendors or employees will wait until a certain date to get paid, you can conserve cash. Not always a good way to start a business.

Love the Loan

While the idea of owing for a business loan may not be appealing, keep in mind that there are great programs in place with the SBA right now designed to help small businesses get started or keep moving. Interest rates are low, and it’s easier to qualify for a loan.

You keep control of your company and just have to pay the loan back over time. You may be able to negotiate paying a smaller payment for the first year while your business takes off, and then increasing your monthly loan payment as your revenues increase.

Small business loans are approved to:

  • Buy equipment and supplies
  • Pay for rent and utilities
  • Hire employees
  • Pay for manufacturing

Depending on where your business is located, you may qualify for other stimulus programs based on urban development.

Check with your local bank or credit union to see if it offers small business loans backed by the Small Business Association, and speak with a business loans expert to determine if you would qualify.

Which Way to Go?

Just because you choose one option doesn’t rule out the other. Let’s say you start by bootstrapping, but then realize in two years that to truly grow your business, you need a bank loan. Or say you take out a business loan but want to pay it off early. You might put in your own money at that point.

Determine how much of a loan you can afford to pay each month, or how much of your own money you can put into your business. In looking at your finances, you might decide neither are a good fit right now, and that you should wait until your economic situation is improved.

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