Starting a business isn't cheap, and for many entrepreneurs, figuring out their funding is a critical first step. Business owners have a lot of financial decisions to make when starting a business, including if they want to fund their own business or secure equity funding.
When a business owner bootstraps a business, they start and expand a business with personal finances and revenue from the company. Other business owners use traditional equity funding, such as funding from friends and family, angel investors, early-stage investment firms, and venture capital firms. Here are the advantages and disadvantages of each approach.
Editor's note: Need a loan for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.
Pros and cons of equity funding
Jen Young, co-founder and CMO of Outdoorsy, explained that equity financing means trading your equity in the company for cash from investors.
"The equity comes from the original founders and this trade dilutes the founders ownership in their company," added Young.
If business owners give away enough equity, the investors may ask for rights such as board seats and preemptive rights, Young said. However, there are some advantages of equity funding such as growing your business faster, being less strapped for cash and investors that could help improve the business.
"An infusion of working capital from an investor or a small business loan can make growing a startup much easier," said Nishank Khanna, CMO at Clarify Capital. "Apart from the capital, an investor also helps connect a founder to people in their network." [Related article: The Startup Path: What to Expect]
Pros and cons of bootstrapping
Instead of getting investors or taking out a loan, bootstrapping business owners decide to use personal credit cards or dip into saving accounts to help fund the business, said Deborah Sweeney, CEO of MyCorporation.com. Once the business is off the ground, they use revenue to fund the organization.
"You are completely self-funding your business when you decide to bootstrap," said Sweeney. "This means you are not taking out loans or crowdfunding or getting investors involved."
"The main advantage of bootstrapping is that you get to keep 100 percent equity ownership of your business and don't take on any debt," Khanna added.
Sweeney noted that the greatest advantage of bootstrapping is that it allows you to discover what you're truly capable of doing.
"You can step back and marvel at what you've done once you're on the other side," she said.
However, completely funding your own business isn't easy.
"Bootstrapping is not for the faint of heart," Sweeney said. "It requires a great deal of budgeting and discipline to do. There's also no guarantee that your hard work will pay off, which is the risk every entrepreneur faces when they decide to start a business."
The bottom line
Every business is unique and follows a different path. While bootstrapping may work for one company, it may be impossible for another.
Before you decide to take on the task of funding your business, Sweeney recommends speaking with a financial professional.
"I can't say bootstrapping is the best option for every entrepreneur and a financial professional can assist you in determining whether or not you can, and will, be able to bootstrap on your own terms," she said.
If you decide to go the equity funding, Young recommends picking your investor wisely.
"They will be with you for the entire journey, and you could be with them for a long time," she said. "Make sure there is a good fit in terms of vision, strategy and direction."