Bootstrapping is the most common way to fund a new, unproven startup. The concept of bootstrapping has been around since the first man decided to set up shop and sell food and tools.
However, in the last 15 years, bootstrapping has become much more common. The idea of starting one’s own business has gone from an American dream to a common right-of-passage for so many seeking a way to insulate themselves from the uncertain economic future working for someone else’s holds.
Whether your business costs you a $1000 or $10,000 to start; the money has to come from somewhere. And the need for regular cash infusions will always be there, if one intends to stay in business for very long.
When operating a startup using only bootstrapping methods, a company is essentially doing whatever it can to stretch every dollar the furthest, while at the same time making every effort to minimize financial liabilities of all kinds.
Pros and Cons of Bootstrapping a Business Startup
- Better customer focus: A bootstrapped startup needs to focus almost entirely on its customers in order to gain traction and move ahead. When investors come into the picture, it becomes harder to focus 100% on customer needs because obligations to the investor and/or their opinions on what’s important begin to cloud the process.
- No approvals necessary: As a bootstrapper, you’re beholding to no one. You can run your business as you see fit – of course taking advice as it comes, but needing nobody’s approval but your customers.
- Forces you to get creative: When you have to figure everything out as you go, your brain is constantly in creative mode. This not only helps you overcome obstacles big and small, but invariably that added creativity leads to better and more profitable products and services for your business down the line.
- Higher failure rate: While 8 out of every 10 new businesses fail every year, a large majority of those businesses fail because of “undercapitalization”. Of all the factors that can lead a business to fail, lack of available funds will always be at the top of the list.
- Slower growth: Growth requires money. This is another undercapitalization problem, but may not lead to definite failure. However, slower growth means that the competition is likely capturing customers you could have had if you had had the funds, further stalling growth and the year-to-year potential of your business.
- Disjointed focus: While bootstrapping can lead to improved customer and budgetary focus, the fact that most startup CEOs are getting pulled in a dozen different directions at any given moment means they’re less likely to give their full attention to the most important elements of the business. Elements that lead to sustainability and growth such as new product development, outreach, and marketing.
How to Bootstrap a Startup
Plan for the unforeseeable
Always plan for the unforeseeable. Having an experienced mentor to call on for advice can really help a new business owner in this respect. They’ve been there and drawing on their knowledge can help prevent financial woes from cropping up unexpected.
There are a number of unforeseeable problems a business may have to contend with. It’s up to you to identify and plan for them:
- Equipment needs (office, manufacturing, sales, etc.)
- Maintenance (computers, manufacturing equipment, fleet vehicles, etc.)
- Receivables getting pushed back or not paid at all.
- Damage to your business from mother nature/vandalism.
- Having your outstanding payables called in, regardless of past agreements.
- Vendors significantly raising prices on raw materials and products crucial to your success.
- Suppliers and outsourcers of unique items and products going out of business on you suddenly.
- Business partners pilfering funds from the company without your knowledge.
- Fines from the city, Feds, or various regulatory boards.
- Lawsuits of all kinds.
As the old popular business saying goes: “Plan ahead, look back often.”
Lower hiring costs
One of the easiest ways to save on hiring costs is to reduce turnover. Turnover kills profits and costs a lot of money to a small business due to training expenses.
This is, of course, easier said than done – if you’re limited to thinking in a traditional sense. However, there are a few great and easy ways to lower hiring costs:
- Learn to do as many jobs as you can in the company early on: accounting, marketing, development, design, HR, etc. And cross-train other partners and employees in those disciplines.
- Use freelancers, online and off, as specialized needs crop up, instead of hiring dedicated staff to do those tasks right away.
- Hire part and full-time virtual assistants using a service that takes care of all the HR hassles that cost business owners like you much needed money.
Save every dollar you can
One of the most important ways a bootstrapping business can save money is to be VERY careful with high interest credit cards and loans. All credit cards have high interest. If you can’t pay the balance during the interest-free grace period nearly all lenders offer now, you need to look for other means to fund with, including a business loan or line of credit from a lender, or a private loan from family members.
Then there’s the allure of wasting money on toys you don’t need. Ask any experienced bootstrapper and most will echo the same wisdom about saving money wherever you can.
A startup can’t afford to waste money on the pretty, shiny things like the latest smartphones, computers, company cars, gold plated pens, etc. Even when a business plans for the unforeseeable, there will always be expenses that crop up unannounced.
That may make financing such things seem like a good idea, but then you’re further increasing your liabilities every month, too. Adopt the image of a lean startup and stick to it religiously.
Get pre-approved for a low interest business loan ASAP
There’s nothing worse than having that “rainy day” hit your business when you have zero cash in the bank to cover whatever financial catastrophe may unfold without warning. Making sure you’re pre-approved for a low interest business loan with a reputable lender insures you can get the funds you need when you need them, without succumbing to dealing with high interest lenders whose success is based off people and businesses who have nowhere else to turn in their time of need.
Doing this doesn’t mean you’re not still bootstrapping. Getting approved doesn’t mean you need to take out the loan at the first sign of financial troubles. It just means you’re thinking ahead and preparing for the unexpected. Whether that unexpected is a lawsuit, fines, collectors calling in your loans, or even a sudden growth opportunity that comes up which requires a sudden cash infusion.
Apply for an overdraft line of credit early
While a line of credit comes with a much higher interest rate than a low interest business bank loan at around prime + 5 percent, this option is still less than half of the typical interest rate charged on a credit card (19.9 – 22.9%).
Rather than using a credit card when times get desperate, have a line of credit at the ready so you don’t have to spend what little profits you may have in the coming months just to keep up on interest payments. Keep in mind that this is for emergencies only and if your bank charges more than prime-plus-five, shop around for a better rate.
Look for ways to leverage the business for other income streams off-hours
Where there’s a will, there’s a way. Like so many bootstrapping methods, leveraging your equipment, facilities and/or skills to increase income outside business hours will be something individual to the industry you operate in and what you have to offer the public and other professionals:
- You can rent your office or shop out when you’re not there: Rent to whomever needs space. If you have a garage, don’t just consider renting it to people who need a place to work on their equipment. Rent to photographers and other professionals that can benefit from your real estate too. Consider renting any unused space as storage too, even if you have to install security equipment to make your offer more attractive.
- Rent your equipment during off hours and weekends: The sky’s the limit and the more expensive the equipment, the more you can charge. Powertools, chainsaws, generators, camera gear, large machinery, trailers, etc. Everything should be up for rental if the price is right.
- Volunteer your services for free to the right people: This won’t make you any bootstrapping cash right away. However, when professionals volunteer their services, it will most certainly result in extra business via referrals. Depending on how and where you’re volunteering, those referrals may come hard and fast (consider high visibility community events like fairs where people who need your services might congregate). Volunteering your services and/or giving away your products to charitable causes will not only guarantee you good karma, it helps to keep the bootstrapping process alive and well until you’re ready to take your business to the next level.
Want to Learn More?
Funding Note is here to help whenever you need helpful tips or advice on how to fund your business. Feel free to contact us via our contact page. Don’t forget to sign up for our newsletter to receive regular updates on trends and changes happening in the funding industry.