What comes to mind when you think of bootstrapping a business? You may be thinking of various ways you can budget on current expenses and put the capital you save towards starting and operating a business.
What Is Bootstrapping a Business?
Entrepreneurs who bootstrap a business are financing their business by using existing cash reserves and sticking to a budget. This is the meaning of bootstrapped: a business that is fully self-financed without bringing on any outside investors, allowing the owners to retain full ownership of the company.
Bootstrapping a business takes a lot of grit, determination, and hard work to see through from start to finish. However, depending on your specific situation, it may not be the best funding method for every entrepreneur.
Here’s how to determine if you are ready to bootstrap a business. We’ll also outline other funding options, such as seeking venture capital or looking into crowdfunding, that may be a better fit if you discover bootstrapping may not work for your startup.
Pros and Cons of Bootstrapping
Bootstrapping your business has its benefits and drawbacks. Understanding both can help you decide if this is the right approach for your business.
Pros of Bootstrapping
Bootstrapping allows entrepreneurs to maintain full control and ownership of their business. Without outside investors, decisions can be made more quickly and with greater autonomy. Additionally, this approach encourages efficient use of resources and promotes a lean, focused business model.
Cons of Bootstrapping
Bootstrapping can limit the growth potential of your business due to restricted financial resources. It often requires significant personal financial risk and can lead to slower expansion. Entrepreneurs may also face challenges in scaling operations and competing with well-funded rivals.
What Else Should I Know About Bootstrapping My Business?
Before you make the decision to bootstrap, it’s important to know the necessary principles behind bootstrapping a business.
Self-funding means that you are proactively working to finance your startup. You are utilizing your own financial resources to fund the organization instead of taking out a loan or seeking investors. This allows entrepreneurs to retain 100% equity ownership of the business.
Bootstrapping a business requires planning ahead. Review the cash flow forecast in your business plan. Assess how you may arrange funding based on needs and the asset type that bootstrapping will be able to finance. This will allow you to create a budget and embrace a nimble approach in spending and making decisions. Careful budgeting and spending can help entrepreneurs avoid getting into business debt.
Bootstrapping Considerations
The first aspect is not to bite off more than you can chew. Entrepreneurs are investing their own money into this business. They need to be mindful that they have enough to invest in the business and enough to ensure they do not drain their savings or retirement accounts. It may be beneficial to create an alternative cash reserve to build a backup nest egg.
The second aspect? Self-financing is not a fast process. The growth is much more gradual than it would be to work with an outside investor or obtain a loan.
In many ways, however, slow growth can be beneficial to small businesses. It allows entrepreneurs to thoughtfully build their business, find unique opportunities to establish partnerships, and have the peace of mind in knowing that this growth is a marathon and not a sprint.
Tips for Successfully Bootstrapping a Business
Now that you understand the principles of bootstrapping a business, here are a few common bootstrapping strategies that can help keep you focused throughout the journey.
Stick to a Lean Budget
From making lunch at home instead of eating out to analyzing each bill and seeing what can be trimmed from its monthly statement, look for opportunities to keep your overhead low and pocket the extra money for the business. Even during periods when revenue is strong, do not make impulse purchases or relax your budget for months at a time.
Use Personal Savings
Fund your business through personal savings. Additional capital you may consider using includes a personal credit card, your 401(k), and any Rollovers for Business Start-ups (ROBS) that allow you to tap into your retirement fund.
Incorporate the Business
Yes, incorporating or forming an LLC is financially beneficial when bootstrapping a business.
Incorporation provides your business with limited liability protection to separate and protect personal and professional assets. An incorporated business may receive tax savings. This is especially true when comparing an incorporated entity like an LLC to an unincorporated entity like a sole proprietorship, the latter of which must pay significantly more expensive self-employment taxes.
Incorporation also helps businesses build credibility with consumers faster and is attractive to potential investors interested in investing with the business. Once you incorporate, take the time to invest in other necessary assets for your business such as trademark registration, obtaining a federal tax ID, and applying for business licenses. This will help your bootstrapped business stay in compliance with its state of incorporation.
Work From Home
If you are unable to afford an office space and have a business that can be run from home, work from home to help offset costs. Keep in mind that depending on the type of business you are starting you may need certain business licenses and permits to run the company successfully and stay in compliance.
Rent Equipment
Do you need to buy certain equipment to run your business, or can you rent or lease it? If the latter is an option, explore it with reputable vendors and suppliers.
Keep Up With Invoices
Being paid on time is critically important when bootstrapping a business. Make sure to follow up on any outstanding invoices and ensure you are receiving pay for the work you did in a timely manner.
Update Your Business Plan
Prior to bootstrapping your business, you likely drafted a business plan for the company. Review this document often. Make edits as needed to detail when you were able to hit certain goals and milestones. Take notes about cash flow and business capital. In time, you may be able to compare revenue for the business on a year over year basis.
Additional Small Business Funding Options
What is bootstrapping isn’t an option for your business?
The good news is that there are other financing methods available. Let’s briefly review some of the most popular funding options.
Business Loans
You may decide to apply for a business loan to fund your company. Consider the amount of funding your business needs. Then, review the loan’s interest rate and the amount of debt you’ll be carrying over time. Finally, determine how quickly you’ll be able to repay this loan.
Investors
This may come in the form of venture capital or angel investments. Venture capital often backs young, high-growth startups with equity funding. This means entrepreneurs receive their financial support. Venture capitalists, in return, get a stake in the company. Generally, this stake comes in the form of company shares or an equity position. Angel investors work a bit differently. These individuals are entrepreneurs who can invest anywhere between $25,000 to $100,000 in an established business. (Venture capital, on the other hand, may invest millions in the startup.) Much like venture capitalists, angel investors will also want equity in the startup.
Crowdfunding
This is a type of startup fundraising that allows people to donate money to your business using a funding platform. Consider whether you will choose a rewards-based or equity crowdfunding model prior to fundraising for the business.
Grants
You may also fund a business by applying for a business grant. Learn more about which grants your business may be eligible for and apply by visiting Grants.gov.
Should I Bootstrap My Business?
Do you still have questions about whether you should bootstrap your business or if bootstrapping is right for you? Reach out to a financial professional and speak with them about bootstrapping and other funding options that may be available to your business.
Examples of Bootstrapping
Many successful companies started with bootstrapping. Companies like Apple, Microsoft, and Dell were initially funded by their founders’ personal savings. These examples demonstrate that bootstrapping can lead to substantial growth and success without relying on external investors.
Why Is It Called Bootstrapping?
The term “bootstrapping” comes from the phrase “pulling oneself up by one’s bootstraps,” meaning to achieve success with minimal resources. In business, it refers to building a company from the ground up using personal finances and revenue generated by the business.
Is Bootstrapping Bad?
Bootstrapping is not inherently bad, but it comes with risks and challenges. While it offers control and independence, it can also limit growth potential and require significant personal financial risk.
Is Bootstrapping Sustainable?
Bootstrapping can be sustainable if managed carefully. Maintaining a lean operation and making strategic financial decisions are key to ensuring long-term success without external funding.
We are ready to assist you in incorporating your small business! Let the team of professionals at MyCorporation guide you step by step through the incorporation process. Reach out to us at mycorporation.com to start incorporating your business today.