Knowing whether or not you should invest your own personal funds in your business or borrow money from a bank or lender could be crucial to your overall success. Waiting too long to borrow or borrowing before you need it may or may not impact your business in a good or bad way. Below I outline several ways to determine whether or not you should bootstrap or borrow money to build your business.
Your Business is High or Slow Growth
According to a colleague of Daniel Isenberg and Ross Brown over at the Harvard Business Review, “High-impact firms …represent between 2 and 3 percent of all firms [in the US], and they account for almost all of the private sector employment and revenue growth in the economy.” With that said, if your business is a high growth firm that reaches at least 1 million in revenue by year 5, borrowing money may not be a bad idea (especially if you have low overhead). Banks and lenders may view you as a good candidate for borrowing money because your business has a proven track record of success (and has grown quickly).
If your business is a slow growth business that lacks consistency in revenues generated, you may want to bootstrap instead of borrow. Inconsistency in cash flow could cause you to default on a loan. I suggest waiting until cash flow is steady and reliable before borrowing. Daniel Isenberg and Ross Brown over at the Harvard Business Review also states that high growth businesses typically include food services, real estate, construction, commerce, logistics and manufacturing. This is not to say that other industries cannot experience high growth. However, these are the most likely.
You Have the Ability to Borrow
Having the ability to borrow means you’ve got what it takes to meet a bank or lenders criteria for approval. Depending on the lender (and type of financing you are applying for) you may need established and well managed business and/or personal credit, valuable collateral to pledge, and proof of business and/or personal income. If you have bad credit or no credit, no collateral to pledge, no business income, or significant personal income you may find it difficult if not impossible to borrow money for your business. If you have good personal and/or business credit, own valuable assets, generate significant business and/or personal income, most banks and lenders will view you with favor. This will make it easier for you to qualify for funding.
You Have the Ability to Service the Debt
Being able to service the debt is critical in your decision to bootstrap or borrow. Borrowing money for your business at the wrong time can be a death sentence. For example, one of my business associates borrowed $500,000 for her business during the early stages and found herself having major cash flow problems when her clients failed to pay on time. It eventually caused her to default on the loan and file for bankruptcy. I say this not to discourage you, but for you to be mindful of how important it is to borrow money for your business only when you are confident you have the ability to pay it back.