Most small businesses are bootstrapped: the founder(s) put in whatever it takes to start and sustain the business until it generates cash flow. This is a terrific funding strategy – efficient and won’t leave you dependent on others. Using your own money to start a small business is an effective way to keep yourself honest about what’s working and what’s not. Especially if there’s not substantial R&D to get it off the ground, you can just start.
Once you get started, or when your business is mature, it may be smart to consider outside investors, however. If your business is stable, predictable and cash flowing, you have a high degree of certainty in next month and next year’s cash flow. But if your business is thinly capitalized – you’re taking out most of the profit in salary, distributions, etc – you may be missing opportunities. This is where the right kind of outside capital can help expand. Many small businesses have a local presence but can expand to other regions, for example. Let’s say you operate a metal stamping business in the east bay. You’ve recently had projects for customers in southern California you’d like to service, but it doesn’t make sense with customer contact, shipping and logistics. You may want to set up a similar operation in the Inland Empire, but it will cost $750,000 and you don’t have the capital.
An outside investor can bridge the capital gap. Structures vary, but raising $750,000 may allow you to double your revenue and cash flow. The details matter – the structure and terms in particular, as well as the experience the investor has with metal stamping. But outside capital can help expand your business in a way that makes the value of your total ownership greater. Your investor might also bring relationships that can be useful for sales or other partnerships.