Three Disadvantages of Bootstrapping a Business
Let’s be honest. No business owner – no matter the size of an operation – likes the debt of a bank loan or being somewhat dependant on private investors. The demands of monthly payments, managing or renegotiating loan terms, and meeting demands of investors are just some of the challenges. Nonetheless, according to finder.com, upwards of $600 billion in loans is borrowed every year (as of 2017).
Of course, applying for a commercial construction loan, apartment building loan, or other types of significant loans for hundreds of thousands – if not millions – of dollars seems like the logical move as very few have access to that kind of cash flow. While there may be a select few that do, using your own funding – or boot strapping your business – has some advantages. For instance, there may be less stress of not having to deal with a bank, direct lender or investor, your business is dependant of all outside financing concepts, and may even become attractive to lenders for future loans if needed for expansion.
Yet, there are also some significant disadvantages of bootstrapping your business to be aware of as well including:
1. No Investor Support
Being independent of outside financing or creativity is a great way to do business. Yet, investors provide more than just funds. The Founder Institute explains that they can potentially be a great means of resources. In some cases, they may have ideal business connections such as additional investors for more financing or attract skilled advisors or employees to help grow an operation – two aspects that can greatly contribute to a company’s success.
2. Much More Personal Risk
Banks and financial institutions are established for various financial services and there are many benefits to having a good working relationship with a lender or investor – one being funds may be more accessible (if you successfully qualify) when your business needs it. According to The Founder Institute, being independently financed means there are greater personal risks. Plus, as many unforeseen problems may arise (and the deep well of cash begins to run dry), you can lose a lot more than just your business.
3. Lack of Development
Staying competitive is pertinent to develop a successful business. Having the cash flow and resources for research and development, analyzing market trends, and constantly staying ahead of the curve are some top attributes with any well-run operation. With limited funds (as maybe compared to an established businesses in the same industry), development may be slower than what is required. As a result, according to Inc.com, “more time on planning and growth milestones or targets” may take longer to achieve.
There are many pros and cons of bootstrapping your business and they should all be clearly understood. Having a strong source of revenue, either from a bank, financial institution or even an investor(s) means added security and financing if the competition gets fierce, the business is slowly heading south, or market growth is not moving as swiftly as once realized.