12 October 2010
By Christian Faulconer, Franchise Foundry CEO
I’m not sure there is a “right” answer to this question because the best way to fund the growth of your business depends on a number of factors. Every funding strategy has pros and cons and each of them sits at a different spot on the risk / reward spectrum. Here are several funding options and some things to consider:
1. Bootstrapping. Bootstrapping a business means that you are funding it on your own or relying on the business to provide the funds you need to grow. This is a great way to maintain ownership and control of your company. You will bear all of the risk but stand to gain all of the reward if your business is successful. Bootstrapping usually means that your business will grow more slowly since capital is limited, but this is a good strategy and I believe you should do this for as long as you are able.
2. Debt. In the early stages of a business, especially in the current lending environment, it is unlikely that you will be able to secure bank debt. If you do, you will probably be required to personally guarantee the debt. Like bootstrapping, financing your business with debt allows you to retain ownership and control but it also means that you bear the risk personally. If you take on debt, be sure the business can afford it.
3. Investment. In many cases it is necessary to take on outside investors in order to raise the capital you need to effectively grow your business. Investors share in the risk and also share in the reward. Selling equity in your business is the most expensive capital you will raise, but it also allows you to grow more quickly and reduce your risk.
4. Franchising. Franchising is rarely included in a list of funding options. This is partly because it doesn’t apply to all businesses and partly because you may have to raise some debt or sell some equity to finance your franchising efforts. I include it here because I think it is a strategy that should at least be considered as a business looks for ways to grow. Since franchisees pay a franchise fee and bear the cost of building out their business, you can grow your business through franchising with significantly less capital.
Most businesses will use a combination of these strategies as they grow. Be deliberate in your fund raising and growth strategies and make sure you understand the true cost of the capital you raise.
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