If you’re starting a new business, your financing options may be limited. Not having access to capital through lenders isn’t always a bad thing, though. Instead of taking out a loan or using a business credit card, you may consider bootstrapping your business.
Utilizing bootstrapping finance instead of outside funds can be possible for some types of businesses, and it may even be preferable to taking on debt. Here’s what you need to know.
What does bootstrapping mean in business?
Bootstrapping a startup is the process of building a business from the ground up with little or no outside financial support. Instead, you use your own personal income and savings, then when you start selling your product or service, the proceeds from your sales.
If you’re thinking about using bootstrapping finance instead of financing, you’re far from alone. According to a study by Fundable, 57% of startups are funded through personal savings and credit.
While there are some challenges to funding your business this way, there are a lot of benefits, too.
Why would you want to bootstrap instead of getting financing?
There are several reasons why bootstrapping your business can be more favorable than borrowing money. Here are just a few.
It can help you stay focused
While your financing options are limited as a new business owner, there are still a bunch that exist. And the more money you borrow, the easier it can be to lose focus, thinking that you have enough money to fall back on if something doesn’t pan out.
In contrast, using bootstrapping finance can encourage you to focus on the most important things you need to do to start making money. It can also help you learn how to become as efficient as possible on less money, a trait that can help boost your bottom line for years to come.
In other words, it could make you a better entrepreneur.
It can save you money
A lot of financing options for new businesses are expensive, and many of them have short repayment terms. If you can’t manage to make something happen with the money quickly enough, it could put you in a difficult financial position.
Even if you can manage the repayment terms of the loan, paying a high interest rate when you could be funding your business for free can work against you instead of for you.
It could put you in a difficult financial position
No entrepreneur wants to think about their business failing. But if something does go wrong and you’ve taken out a bunch of debt, most of which likely required a personal guarantee, you’d be on the hook to pay back the amount you borrowed, plus interest, using your personal assets.
If you bootstrap, you’ll still be out the amount of your own money you poured into your business. But you won’t have to pay interest on top of it and risk having a delinquent loan reported on your business and personal credit reports.
Pros and cons of bootstrapping
Using bootstrap finance for your new business does have some advantages, but it can also come with drawbacks. Here are some benefits and drawbacks to consider.
Pros
- You’ll save money on interest charges.
- You can avoid the threat of a delinquency or default damaging your business and personal credit.
- It could force you to think about the most important things you need to do to help your business succeed.
- It could teach you to use your business funds more efficiently.
- You’ll achieve a sense of accomplishment.
Cons
- You may not have enough personal savings to achieve your goals.
- Forcing yourself to be efficient on less could limit your growth.
- With disciplined spending, more money could help you reach your milestones more quickly.
- It could stop you from bringing on other people who can deal with less important tasks.
- It could cripple your personal finances.
When you should consider financing instead
Bootstrapping your startup can be the best option in some situations, but there are several reasons to think about using financing instead.
It can limit your personal risk
While most business debt you take on as a new business owner is likely personally guaranteed, you won’t be putting up all of your personal funds up front like you would when bootstrapping.
Making loan payments from a failed business isn’t ideal, but it can be more manageable if you still have your savings to draw from as you figure out the next steps.
You have aggressive goals
If you’ve already run a business or worked in the same industry, the learning curve won’t be quite as steep, which can make it easier to hit the ground running. If you have big goals, getting financing can help you grow your business faster.
Your personal savings are inadequate
The last thing you want is to have your bootstrapping efforts fall short without a safety net to fall back on. Getting funding from outside sources can help ensure that you have enough money to do what you need to do to succeed.
Also, keep in mind that choosing between bootstrapping finance and outside financing isn’t an all-or-nothing situation. If you like the idea of bootstrapping your business but aren’t sure you’ll have enough, consider using a little financing to provide that safety net while you focus on your personal savings to get the job done.
Great financing options to consider for startups
If you’re thinking about applying for business credit to help you run your new business, here are a few to consider.
Vendor credit
If you’re already working or planning to work with a supplier or vendor to get inventory or supplies, you may be able to set up a credit agreement with them.
Vendor credit, also called supplier credit, can allow you to defer payment to a later date, typically 30 or 45 days after you receive the invoice from your supplier. In many cases, you won’t even have to pay interest on the invoice if you pay it by the due date, and you may even qualify for a discount if you pay early.
A supplier credit arrangement isn’t like a loan and is a good option for business owners who prefer the idea of bootstrapping their startup.
0% APR credit cards
Business credit cards can be a great asset to any business. But when you’re starting out, there’s a specific type of business credit card that can be extremely beneficial.
Specifically, credit cards with introductory 0% APR promotions can help you get the financing you need in the early stages of your business, with the opportunity to pay it all back interest-free.
This feature isn’t as common among business credit cards as it is for consumers and the cards that offer typically give you a promotional period of no more than 12 months. But if you can qualify for a card that offers it and have a plan to pay back the debt within that timeframe, you could save a lot of money.
The bottom line
Bootstrapping your business can be a great way to achieve your goals without dealing with lenders and interest charges. But in some situations, you may be better off borrowing money than using your own.
As you consider how you’re going to fund your business, think about all of your options and the benefits and drawbacks of each. Write up your business plan and get specific about how much you need to get to where you want to go. In the course of your research, you may find that one is better than the other for your situation, or it might be beneficial to use a mix.
Whatever you do, focus on the solution that will give you the best chance of succeeding.
This article was originally written on August 22, 2019 and updated on January 20, 2021.
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A common term you hear with start-up businesses is bootstrapping. When business owners bootstrap their business, they start and grow their business on limited funding that they would generally receive from family and friends. They are expanding their business on a tight budget, and there is no extra room for excessive or necessary spending.
A bootstrapped business is also known as self-funded. Self-funded means that traditional financing methods such as bank loans, capital raises, and crowdfunding are not sought after or utilized.
When bootstrapping, the business owner fuels the growth of the business by reinvesting the profit that it is making into the business and only paying for necessities and things they can afford.
Some argue that bootstrapping leads to a much slower growth rate in the business. However, there are many advantages to bootstrapping as well.
Small business open for business
The benefit of bootstrapping is to grow your business without incurring a large amount of debt. When companies are over financed, carrying that debt can be debilitating, especially at the outset, where sales can be sporadic and cash coming in the door is unpredictable.
However, when you bootstrap your business, you do not have investors in your business or incur expensive debt that needs to be repaid. Bootstrapping is creating a self-sufficient company that requires no additional financing.
Many business owners choose to bootstrap over any other method to grow their business because it allows them to grow their business debt-free and maintain 100 percent ownership and control of the company.
When businesses bootstrap, they are self-funded and independent, and they have the freedom to make their own choices without consulting an investor. But some business owners would instead get investors for their business and consider venture capitalists or angel investors for additional funding.
Venture capitalists are looking for start-ups with promising growth projections and use other people and businesses’ money to invest in the start-up. In return for investing in the business, venture capitalists usually want a piece of operational control in the company. Venture capitalists typically offer more significant money to finance at a lower interest rate.
Angel investors are typically wealthy people who invest their own money in a start-up business at a lower rate of return than venture capitalists usually offer. Angel investors are notable because they use their wealth to help start-ups with their companies.
Confident businesswoman giving presentation
gettyRisks of bootstrapping
It can be beneficial to bootstrap your business, but there are also cons to bootstrapping. Investor’s networks and having access to them can be great for a start-up that otherwise is unknown with few contacts that will get them in front of the right people.
Bootstrapping a business takes much hard work, slower growth, and limited resources can make it scary and frustrating. You need to be on top of your finances and know where every dollar is going, and there are sacrifices made in exchange for being debt-free.
Despite all the cons of bootstrapping, it is a popular method and once you overcome the growing pains of business and reach that stage where you feel financially confident with the company. Many business owners come out very grateful that they stuck it out when things got tough and maintained full ownership of the business.
Combining bootstrapping with investors
Although both methods have pros and cons, it does not need to be the choice of one way or the other solely. You can combine both methods with success. Many businesses successfully grow with bootstrapping and angel investors, where the angel investors take a passive investment approach in the business and do not require a percentage of control.
The bottom line is that you, as a business owner, need to make decisions that are comfortable for you. When building a business, you must envision the result you’d like to achieve. That means whether you want to bring on active investors, passive investors, or simply no investors. You need to consider the possible outcomes for each option and understand what it means to give a piece of control in your business away.