There are several entrepreneurs who have stood by their business and funded all operations before getting outside financing. People like Dave Elkington funded his startup for around 8 years before he could get an appropriate venture capitalist deal in 2012. And he didn’t do it because he had money- No. He had to clean some offices at night to get some money for the business’s payroll.
The main reason why he didn’t want to take any loan is that he valued independence. Worrying about outside influence or debt collectors is not a fascinating idea. But this decision was very crucial in ensuring a negotiating leverage with the appropriate investors. In fact, when your company has a track record of controlling costs, you can negotiate the best rates on a finance deal.
Elkington has now secured about $264 million since his first funding round with venture capitals. Today, InsideSales is worth $1.65 billion and it was started in 2004. And all this funding was raised from 2011.
Another start-up valued at $1 billion is PluralSight and it deals with online learning. While the founders were trying to build the company, they did everything to keep external funding at bay and the major reason was to ensure the business took the direction they had envisioned. According to Aaron Skonnard, a founder, keeping the business afloat even when faced with cash flow difficulties has been very instrumental. Venture capitalists were impressed by the business and have invested over $200 million since 2013.
However, making a decision to fund your business from personal sources has never been easy. Bootstrapping a business is dependent on several factors. And before you think about taking outside funding, consider the following.
Debt financing is not appropriate for new business
While debt is a good method of ensuring business growth for people not ready to trade equity, it is best suited for businesses that are already making money.
Furthermore, most banks dealing with small businesses will look at cash flow when determining the ability to service the loan those are giving $5000 approved for people with bad credit. This is a requirement that most start-up businesses can’t easily meet which leads to reduced funding opportunities. Therefore, it’s best to understand that debt is designed to aid the growth a running business as opposed to starting a new business. If your business has an unproven track record, go for equity financing options. To sum it up, debt should always come after establishing a customer base and stable revenue.
Beware of a personal-loan guarantee
If you take this option it means that you will have to pay the loans should the business fail. Risking losing your personal assets because of a new and untested business is not something to be taken lightly. The chief advantage of financing business operations from personal cash flow is total equity. Also, it means you don’t worry about giving bank guarantees for risky personal loans.
While it may seem out of reach, more and more people are bootstrapping start-ups from personal funds. Andrew Filev of Wrike, a workflow technology company, financed the business for five years and only used personal savings. Having started the company in 2007, he secured his first venture capital funds in 2012. Today, the business has more than 3000 clients and investors have injected more than $26 million which has brought the company value to $125 million.
This founder is quick to note that a loan is only viable if you already have sufficient assets. He also adds that his startup would not have qualified for a good loan because of lack of collateral. However, Filev was committed to establishing a strong track record that was built on other factors besides outside funding. As a rule of thumb, Filev suggests you first ask yourself if you can risk your house for a start-up that hasn’t stood the test of time. If you are struggling with the idea, it’s best to keep off the loan.
Consider the speed of growth
A huge disadvantage of funding your business from personal savings is the slow growth and market establishment. In business, you only grow by selling and the more you sell the more the growth. And since you don’t have enough money, the main source of funds for growth is from your customers.
Normally, you can have a well-researched product which will be a perfect match to the target market. If you have a regular cash flow, it can be easy to grow although it won’t be as fast as when you have outside funding.
Only consider loans after achieving some specific growth milestones
FemCity is a good example of businesses that successfully used a growth pattern to utilize outside funding. This is a start-up focused on women professional network. The founder only considered outside funding only after achieving a 250% growth in one year. The growth came from aggressive marketing campaigns and it was time for breaking into the next growth level.
Because the funding came at the most appropriate time, the company achieved phenomenal growth and improved revenue generation. As a new company, getting a loan may be difficult but once you have achieved significant growth, it becomes easy.
Loans can set limits to business flexibility
When your company is in a loan agreement, it means there are things that you can’t do. Making certain changes may not be viable simply because you won’t be able to afford most of them.
Before taking a loan out of desperation, first, consider the implications to the business. The best way to bypass the temptation to take a loan from any source is thinking through the long-term effects. When in need of temporary funding, find an appropriate line of credit to solve cash flow problems.
Don’t wait until you need a loan to find lenders
If you think that you’ll need a loan for the business at one time, find potential lenders early. Taking a loan means the lender has some kind of trust and faith in your business. To build the relationship, start talking with lenders early enough. If you manage to build a good relationship with banks, it’s easy to ask advice regarding the most appropriate time to take a loan. While this doesn’t mean you can bypass essential qualifications, it means you will be informed on what needs to be done to qualify.
Considering debt to finance your business is not a matter that can be lightly taken. In fact, considering the factors discussed above can increase the rate of success for a business. However, it must be remembered that loans work well on businesses with active customers and sales.