They say the pandemic can be a great time to invest in a business. This is especially true if you have fully-funded emergency savings, you are able to tolerate risks, and have enough cash on hand to support your business. But one question that many business owners-wannabes need to consider is whether they should use their own money to start a business or not.
Let’s say your plan is to make an auto loan franchise investment. You can consider bootstrap financing or apply for a small business loan just to fund your new business. But the question is, should you use cash or get a loan instead?
One of the quickest and easiest ways to fund a startup is by using your personal savings. The only person you need to convince is yourself or your partner if you have a joint account. But remember that you don’t only need to ensure you have enough funds to finance the business, but more money to cover additional costs in the future.
Bootstrap financing your business has its own perks and drawbacks. Knowing what these are will give you a better understanding of what bootstrap financing entails. This will also help you make better sense of your situation and check if this type of financing suits your situation well.
Perks of Bootstrap Financing
Financing your new venture with your own savings offers numerous benefits. Here are some of these.
Fast and Easy Financing
Bootstrap financing means there is no need for you to go through the loan application process. There are no paperwork to fulfill and lenders to talk to. You only need to convince yourself and be willing to risk your savings to fund the new venture.
If you share a savings account with someone like your spouse, they are the only ones you need to talk to. Once everything is settled, you can start using the money as needed. It is the easiest and quickest way to secure funding.
Better Control
Since you are the one financing the business, you have more control over your finances. You can pay yourself back once you are ready. There are no lenders or banks after your back in case you fail to pay off the cash after a few months.
You also get to make all the decisions since you don’t rely on any investor’s money. There will be no investors withdrawing their support and you can run your business as you wish.
Retain Full Ownership
Another perk of bootstrap financing your brand is you get to be the sole owner of the business. This means you will receive all of your future profits. This gives you the authority to allocate funds accordingly and build a business that fits your lifestyle.
Drawbacks of Bootstrap Financing
It is important to realize that there are also cons in using your own savings to financing your business. These include the following.
Limited Resources
Without other financing options, you have no one to turn to in case you need additional funds. You can use this to buy new equipment, pay your employees during slow seasons, and in paying your vendors. This can also restrict the size and scope of your brand or your ability to scale your business.
Huge Financial Risks
If your venture fails, you will be the one who will suffer the most. All the consequences of your failed venture lie in your hands. This means you could end up paying your debts with what limited resources you have in the first place. You are on your own without a mentor to help you out, and with no investor to help pay for your costs.
This can put a strain on your personal finances. You can end up with little-to-no money left in your emergency savings. Your family life can be affected; you can even lose your home and your other assets if your business fails.
Many entrepreneurs try their hardest to gain easy access to financing. This is the reason why many opted to self-finance their business. They want to have better control over their brand and retain most of their profit.
But then, this kind of financing has its own drawbacks. There are huge financial risks involved without the assurance of getting your money back. You are also limiting yourself of your brand’s ability to scale if you only rely on your personal finances.
Add the fact that you can’t grow your business credit with just bootstrap financing. This is why it is a good idea to explore all kinds of business financing before committing to one. This will help you assess your situation better, know which ones can best suit your business needs, and can support your future goals.
It does not matter what kind of business you plan on investing in. It is crucial that you explore your financing options. This way, you can calculate your risks and start making better decisions for your brand.