When you're starting a business, the question as to whether you should pay for the venture with your own money or take out a loan inevitably comes up. While a lot of traditional ways of doing business advise getting a small business loan, there are also plenty of successful business owners who bootstrapped their ventures.
The truth is there is no one size fits all answer here. Everyone's business and financial situation is different. With that being said, here are some questions you may want to consider when deciding.
What stage of your business are you in?
While small business loans may be targeted at people starting their businesses, many of them find themselves owing a lot of money because their businesses were not yet mature enough to know how to properly invest the money that was loaned to them.
That's why it's important to figure out what stage of your business you are in. Are you just starting out with a plan you wrote on a napkin one night at dinner? Or, are you already somewhat established, know where the money is coming from, and feel like extra money in the form of a loan can take you to the next level?
If it's the former, you may want to spend some more time bootstrapping your venture until you are clear on where the money will come from to pay back the loan.
What's your risk tolerance?
Risk tolerance is also something to consider when considering a business loan. Some people are great with risk and thrive under pressure. Others collapse.
Everyone is different so it really depends on how you honestly feel about risk. Are you indifferent to it? Does it put your stomach in knots? Do you actually kind of love it?
Can your finances handle the potential for failure? When assessing risk, it is a good idea to consider the worst case scenario and to minimize the possibility of a bank-breaking disaster. If you have realistic goals and a solid plan to achieve them, then a small business loan may be a small risk worth taking. If you don't have the finances or the plan to justify the loan you would need, the risk may be too high.
What are the costs of running your business?
The size and costs associated with running your business can be key indicators in trying to decide whether you should bootstrap or take out a loan.
For example, if you have an online business your costs may be incredibly low because you don't have to lease a location. Your overhead in general is also probably really low so bootstrapping may be the way to go.
But if you have a business that may require a brick and mortar location, such as a retail store, your costs may be a lot higher and perhaps you don't have that kind of cash on you. In this case researching small business loans may be beneficial.
Note that this isn't to make a blanket statement that brick and mortar businesses should take out a loan and online businesses shouldn't. There are certainly instances where the reverse may be the case.
What it does mean is you have to look at your costs and take into account what kind of cash you have on hand and whether or not you've got enough money coming in to support it.