Working capital is considered as the lifeblood of each small business. No entrepreneur can run, expand, and grow his small business without adequate working capital. The small businesses can fund their working capital needs through a number of options. Small business owners can fund working capital needs through a variety of loan products – business loans, overdrafts and line of credit.
But the small business loans will require the enterprise to incur additional debt and expenses. At the same time, small business owners can meet working capital needs through bootstrapping without increasing debt and paying interest. They have option to choose from a number of bootstrapping techniques – borrowing money from friends/relatives, switching from sole proprietorship to partnership, avail trade credit, and deferring payment.
Each of these bootstrapping techniques enable small business owners to find working capital needs without increasing debt or expenses. But the small business owners must understand the important differences between Small Business Loans vs Bootstrapping to pick the right working capital financing option.
Small Business Loans vs Bootstrapping: Understanding Important Differences between Small Business Loans and Bootstrapping
Increase in Debt and Expenses
As noted earlier, the bootstrapping techniques help entrepreneurs to fund working capital needs without incurring additional expenses. The small business owners are not required to pay interest or EMIs. On the other hand, the small business loans will require the borrower to pay interest at a predetermined rate. The rate of interest on small business even differ from one lending institution to another.
Credit Score and Credit History
Bootstrapping enables entrepreneurs to avail funds regardless of their personal credit score or credit history. But no entrepreneur can avail small business loan products without maintaining a good credit score and establishing credit history. They need to meet the business loan eligibility criteria set by the lending institution for the specific small business loan product.
Impact on Cash Flow Position
An entrepreneur has option to choose from a variety of small business loans. The small business loan products differ from each other in the categories of interest rate and repayment period. But the entrepreneur has to explore ways to repay the debt without impacting his business’s cash flow position. On the other hand, bootstrapping techniques does not impact the business’s cash flow position directly as the business owner is not required to make monthly payments. Here are some tips to manage business cash flow in a better way.
Normally, lending institutions provide both secured and unsecured business loans. But often lending institutions do not provide unsecured credit loans to startups and recently-started businesses. Hence, small business owners have to use their personal or business assets as collateral to avail credit. The bootstrapping techniques do not require entrepreneurs to use any asset as collateral.
Access to Credit
Often entrepreneurs have to put extra time and effort to raise working capital through bootstrapping techniques. They cannot leverage bootstrapping to fund immediate working capital needs. But the new age lending institutions leverage financial technologies to provide credit within 48 hours. An entrepreneur can further avail credit based on real-time data like value of unpaid invoices and monthly sales routed through EDC terminals.
Amount of Working Capital
The working capital needs differ from one enterprise to another. Some enterprises need additional working capital during a specific season, whereas others need additional working capital to facilitate modernization, expansion, or growth. Small business owners often find it challenging to raise huge amount of funds through bootstrapping. But they can easily meet high working capital needs by choosing the right small business loan product.
Entrepreneurs have to put extra time and effort to meet working capital needs. Also, the bootstrapping techniques will not enable them to meet high working capital requirements. Hence, they must opt for the funding option if the working capital is not high. On the other hand, the entrepreneurs have option to choose from a variety of small business loans. But he must evaluate the loan products to avail credit on favorable terms.
On the whole, bootstrapping techniques enable small business owners to meet working capital needs without increasing debt or expenses. But the small businesses cannot meet high working capital requirements. On the other hand, they can meet high working capital needs through a variety of small business loan products. That is why, the entrepreneurs must compare small business loans and bootstrapping elaborately to decide the best working capital funding option.