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Bootstrap or seek finance

Discussion in 'Financing Your Business' started by Steve41, Jan 10, 2018.

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  1. Steve41

    Steve41 Member

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    This may already be covered somewhere in this section but I'm wondering what peoples thoughts and or experiences have been scaling their companies with bootstrapping vs seeking finance.

    To be clear here are my definitions as I understand them:
    • Bootstrapping - reinvesting profits back into the business as a way to acquire new assets and build the company. No loans, no investors etc..
    • Financing - Acquiring assets and building the company by taking out loans, credit lines or bringing on investors etc..
    Thanks
    Steve
     
    Edvin and djbaxter like this.
  2. Edvin

    Edvin MVP Member Top Contributor

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    Hi Steve, the strategy will depend on the situation that yields the greatest economic value.

    Can you earn higher interest by holding onto your capital? For example, a company might put its capital in money market and pay a lower rate via dividend payouts.

    Historic financials record can influence your decision. For example, an accountant may suggest a loan because paying interest will put you in a lower tax bracket; thus, making it wiser financial strategy.

    Another case might be to reduce risk.
    For example, instead of using company capital, you take out a loan for the business venture. Thus, you won't scramble for cash and get loan approval when you are low on operating cash.

    I've considered taking a $50k loan against my 401k; to only pay back myself the interest.
    Considering that I'm starting a new venture, I don't need the overhead of interest payout; that money is available when I need it.
    Similarly, I have a line of credit available against my house; again, am not planning on using it until emergency because I would have to pay back the interest, which is vairable.
    Minimizing expenses is an important element during a company's infancy, which is not always easy to do.
     
    Last edited: Jan 10, 2018
    djbaxter likes this.
  3. Steve41

    Steve41 Member

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    I'm leaning towards bootstrapping it because I'm offering a service rather than a physical product which would probably have more overhead and startup expenses. The problem will be that you need money for advertising, and advertising to make money so its the "chicken and egg" story. I know that there are free forms of advertising but requires a lot of time and effort.... so I better get crackin' :)
     
  4. Edvin

    Edvin MVP Member Top Contributor

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    I agree with your plan.

    I would add that you should have a marketing budget.

    In my case, I plan to spend $3,000 to $4,000 per month. This may seem steep for many small businesses; but, after seeing a common theme across different franchiser within my target industry, I am hard pressed to think that spending significantly less or more would be a good idea.
    I will certainly dial my spending as I aquire more relevant experience.
     
  5. Steve41

    Steve41 Member

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    I find that determining a marketing budget is one of the hardest things to do especially when your just starting out. Any tips on building a budget for a service going B2B?
     
  6. Edvin

    Edvin MVP Member Top Contributor

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    Simply find a franchise service that is similar to your business and lookup the Franchise Disclosure Document on FDDexchange to see what they require new franchise owners to spend.

    Alternatively, call up small owners out of your area and explain you are starting new business and wonder if they mind answering a few questions for guidance. I did this while exploring franchisers.
     

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