Every business needs capital to grow, no matter whether it’s a mom-and-pop storefront or a mature multinational corporation. Startups face particular challenges, however, given that they are generally untested and unproven.
For a new business in today’s economic climate, securing enough funding from a bank may prove a difficult proposition depending on how much it needs to borrow and how much collateral it can offer. For that reason, some entrepreneurs turn to courting investors or financing the business themselves. Both of these methods have own pros and cons.
Investor Cash Can Be Blessing and Curse
Money from outside investors can be very appealing for the simple reason that a business owner is not risking his or her own nest egg on the new venture. In addition, investor funding can help fuel massive growth in a relatively short term. However, that has the potential to be both a blessing and a curse. Uncontrolled growth can bring challenges – business owners may have little time to consider and refine their product and/or strategy as they become consumed by the demands of daily operations.
Large sums of outside capital can also bring publicity and media attention. On the plus side, that exposure can create word-of-mouth buzz, bringing customers without the expense of traditional advertising. On the flip side, however, a heavy amount of attention can overwhelm a startup, ratcheting up demand beyond supply capacity and threatening to undo any initial positive press with a wave of customer dissatisfaction.
In short, a new business must be ready for all eventualities when it hits the market.
Bootstrapping for Controlled Growth
Unless we’re dealing with the likes of Bill Gates or Warren Buffett, the option of self-financing a business – also known as bootstrapping – probably won’t yield the quick growth and flash of an investor-funded startup. What it can offer, instead, is an enhanced level of control and stability, which may prime a business for long-term success. When owners bootstrap, their business can only grow as fast as their revenues and their ability to pay employees. That makes it less likely that customer demand will outpace the quantity or quality of the goods, or the capabilities of the workforce.
Of course, there are tradeoffs. Bootstrapping means the owner assumes the financial risk if the business fails. It may also be tricky to cover expenses, especially in the early days when sales volume is low. This is where a business owner may need to get creative, at least in the short term, in generating revenue and trimming expenses, which could include reducing or foregoing a salary. Other possible options include working from home to avoid office rent and using social media and other technology for low-cost marketing.
Funding Help Available for Small Businesses
There’s no denying that having a pot of cash at the ready would probably make life easier for startup businesses. Still, there are ways to grow a business with little or no capital. Online affiliate programs, for example, can provide a revenue stream – a business earns a commission each time a visitor to its website clicks a link to another firm’s products. Joint ventures, meanwhile, allow business owners to pool resources and share expertise.
The Small Business Investment Company (SBIC) program, which is part of the U.S. Small Business Administration, seeks to help business owners secure private funding and long-term loans, with the overall goal of boosting private-sector job creation.
In FY 2012, the program provided financing totaling $3.1 billion to more than 1,000 small businesses, a 17% increase over the previous fiscal year. Almost one-third of the recipients were owned by minorities, veterans or women, and/or located in low- to moderate-income communities.
According to the Small Business Administration, about 65,000 jobs were sustained or created as a result of SBIC-related financing in 2012.
Whether entrepreneurs and small business owners tap into government programs such as the SBIC, finance themselves or seek backing from outside investors, they have options for securing startup capital.
About the Author: Dean Vella writes about business and leadership on behalf of University Alliance, a facilitator of online certificate programs in business administration, and leadership and management.