In 2014, I started cravebox.com with no business experience, no connections, and very little money. I decided to fund CRAVEBOX with my own money as opposed to raising money from others or taking a loan. Now, in 2022, I’m happy I decided to fund it myself and I believe most startups and small businesses should be bootstrapped. Below I’ll discuss the 3 main ways to fund your startup – Sell Equity, Take a Loan, and Your Money – and some pros and cons of each. Overall, you will see that I think using your own money to fund your startup is the best decision.
Selling equity means that you will take money from an investor to fund your business in exchange for an ownership stake in the business. For example, if you sell 50% of your business for $1M, you now have $1M in cash to start and operate the business, but you only own 50% of the business. The advantage to this is that you avoid the regular expense of a loan (principle and interest payments), and the investor who now owns a portion of your business, might be a helpful partner in terms of knowledge and connections they bring to the table. The disadvantages are that for a new startup, it’s going to be very difficult and time consuming to raise funds by selling equity, especially if you have no track record as an entrepreneur. This is because it’s very risky for an investor to invest in a new business that hasn’t generated any revenue or profit yet. Because their risk is so great, they will be hesitant to invest and when you do eventually find an investor, they will likely want to value your business at a low valuation – which will allow them to take a large share of the business for a low price. This can be harmful to you in the future when the business is successful and you’ve sold a large portion for a low price in the past.
Take a Loan
Taking a loan has some advantages that were indirectly mentioned above. Since the expense of loan is fixed (assuming fixed interest rate), it can be a much less expensive form of funding if your business becomes very profitable. For example, if you sold 50% of the business for $1M, as mentioned above, and in 5 years the business is generating $5M in annual profit, you will effectively be losing $2.5M of profit as compared to if you owned 100% of the business. A loan can be much less expensive in this case. For example, if you funded the business with a $1M loan instead of selling 50% equity, and the loan was at a 7% annual interest rate with a 10year amortization, you’d have approximately a $140,000/year payment to service that debt. Obviously this is a lot less than $2.5M/year and the loan payment will be finished after 10years, while the expense of the equity is in perpetuity. A loan however has disadvantages – while the business is not profitable, you will still owe this $140k/year. Selling equity, you only have expense when the company makes a profit. So a loan is risky – it puts financial stress on the company, but if the company is successful, using a loan, or leverage, can be more efficient than funding with equity.
My favorite form of funding for a new business or startup is to use your own money. I think most new businesses should use this method because it’s fast, easy, allows you to keep all equity and control, claim to 100% of future profits, and doesn’t require the fixed expense of a loan. Also, in my opinion, it’s more stressful to lose other peoples’ money than to lose my own money. To employ this strategy, you need to save adequate funds and maybe keep a part-time job so you can feed your business’s startup and operating expenses while still meeting your living expenses. This strategy is also great because it will force you to be more innovative, apply more effort, and be more conservative since you likely won’t have a large pile of money. It will also force you to make your products and services profitable from the beginning. As I mentioned, I started CRAVEBOX with very little of my own money – I took on no debt and sold no equity. I still own 100% of CRAVEBOX and very rarely use a line of credit. Starting CRAVEBOX in this way forced me to price my products with gross profit built in from the start and control expenses to maintain a healthy operating margin. This meant that once I started doing sales, I was profitable, and the business’s operation could quickly fund itself.
About John Accardi
John Accardi is the founder and CEO of cravebox.com and starcourse