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The University of St. Thomas Opus College of Business invites you to participate in the Outside Consultant Q & A column, which appears weekly in Monday Business Insider. E-mail your questions to: www.stthomas.edu/business/schulzeschool/submitquestion.html

Ask the consultant: Bootstrap or borrow in order to grow?

  • December 2, 2012 - 8:40 AM

Question

As an HR expert, I know my realm of business but have never had a head for numbers. However, I am trying to expand my firm and wanted to get your thoughts on the best way to grow in regard to capital. Do you believe in bootstrapping and paying as you go or borrowing? If borrowing, where should I turn?

JOHNNY DUNCAN, PHR

DUNCAN CONSULTING INC.

JOHNNY@DUNCAN-CONSULT.COM

Answer

When it comes to bootstrapping vs. raising capital, a key consideration is how critical it is for the business to grow quickly. If you are entering a new market where there is a limited window for acquiring customers before competitors enter, then oftentimes it makes sense to raise capital to fuel growth. If this isn't the case, then bootstrapping growth can be an attractive option, especially if the business cash flows well.

A significant part of your decision will also come down to personal goals and comfort levels with risk. Even if you don't like numbers, I would suggest doing some rough projections to estimate how quickly you can grow with your existing cash flow, and decide if that growth is attractive to you. If it isn't, or if you think you can grow more quickly with additional capital, I would have a conversation with a couple of banks about the types of loans that might be available (you may want to do this regardless; it never hurts to have this sort of discussion). When you sit down with bankers, prepare a summary of your past revenues, expenses and cash flows, along with how you see growth progressing so they can help you evaluate your situation.

At the end of the day, there isn't a right answer -- it really depends on the individual business and owner. The most important thing is to educate yourself on your alternatives so you can make an informed decision.

Jay Ebben, Ph.D., associate professor, Entrepreneurship Dept., University of St. Thomas Opus College of Business

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