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.
Entrepreneurs who bootstrap a business are financing their business by using existing cash reserves and sticking to a budget. This allows entrepreneurs to fully self-finance the company without bringing on any outside investors and retain full ownership over 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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Amazing! I came across this post at the right time! Self-funding seemed a bit overwhelming for me so I was considering to find investors. That's when I stumbled upon the post and I have a clear idea on how to modify my strategies. Thank you so much for the advice, Deborah.