Creating and running a business takes money. Starting a brick-and-mortar business can easily require tens of thousands of dollars and even more for one that’s equipment-heavy.
That’s why one of the most consequential decisions a women entrepreneur will make is how she’ll fund her business. Should she bootstrap or seek external financing (borrow or raise funds)? There are pros and cons to bootstrap financing that need to be considered.
Bootstrapping refers to an entrepreneur using personal resources such as savings, retirement accounts, and personal credit cards, as well as operating revenue to build and operate their business.
WEOC’s Bootstrap or Borrow? survey revealed that self-funding was most often used by women entrepreneurs to launch their enterprise and fuel ongoing growth.
There are several advantages to bootstrapping that make it a natural choice:
- It gives the entrepreneur more control than other financing options. She can decide how she’ll run the business without external input, and how and when to inject or withdraw funds. This is often seen as more appealing than having to meet repayment and operational criteria necessary to receive outside funding.
- She retains full ownership of the business, which means keeping 100% of the profits.
- If clarity is important, she knows exactly how much money is available to run the business.
Several of these benefits were reflected in the responses to the survey.
However, a personal preference to self-fund brings its own set of risks that women entrepreneurs must be aware of:
- Using savings may put a strain on her finances and personal life. Before tapping into savings and/or retirement funds, entrepreneurs must consider the long-term impact that could have on their current and future existence. Funding a 25 to 30 years retirement requires moderate to large, regular contributions. In addition, there’s a high likelihood that an unexpected financial emergency will occur at home or in the business that could require an influx of money – sometimes in the tens of thousands of dollars. Self-funding can put the entrepreneur and her family in a stressful financial position.
- Self-funding could lead to added operational pressures. For example, the entrepreneur may need to be more reliant on quick inventory and accounts receivable turnover to generate enough cash to keep the business running smoothly if no other financing options such as loans or lines of credit are in place.
- Scaling the business will be constrained by the net cash flow generated. Bootstrapping often leads to a slow buildup in retained earnings and may not provide timely or enough investment for them to grow at a reasonable rate or take advantage of emerging opportunities.
- Credit cards are often used to fund a business. While easier y to get relative to larger-scale funding, their high interest rates can be very expensive for long-term business expenditures. If credit card debt is not well managed it can lead to poor credit scores, making future financing difficult to access.
One of the bonuses of external funding is the strategic support and networking opportunities that may develop as a result of affiliations with financial institutions or investors. Self-funders may not have access to these same benefits.
Choosing the right financing option is a personal decision and must make sense for a woman entrepreneur’s business and personal life. Ultimately, she has to feel comfortable in her ability to execute on any internal and external obligations.
The answers to the following questions will help women entrepreneurs choose the best options for them:
- What is your vision and ultimate goal for the business? Do you want to run a small lifestyle venture that can accommodate self-funding or do you want a high-growth, big scale organization that will likely require external funding? Are your aspirations hindered by self-imposed funding constraints?
- How are you positioned to cushion the impact of an unexpected emergency or a sudden increase in expenditures in the business and personally? How much have you saved in your emergency fund? Can you avoid tapping into funds earmarked for retirement, especially tax-advantaged ones that provide long-term benefits?
- Do you have both personal and business budgets? If so, how well do you adhere to them? How indebted are you, and will self-funding put you in a damaging situation?
- Is your hesitancy to explore external financing a result of an aversion to debt, pride in being self-reliant, or not wanting to lose control? If so, is this getting in the way of your business goals? Refer to mental models article
- Could you be overly optimistic about the profits from the business that make self-funding appear to be a good option? Refer to xx article on good sludge.
- Would external funding give you additional support that you otherwise won’t have, such as advisors, mentors and networks?
If self-funding is the only option now due to the absence of any viable external funding alternatives, can you position the business so you can revisit acquiring debt or raising money at a later date?