Bootstrapping Basics for the Small Business Owner

As every entrepreneur knows, starting a new business requires capital. Often, business owners pursue funding from investors or loans; but many others decide to launch their businesses through bootstrapping.

First, let’s define the term: Bootstrapping means starting a new enterprise without the help of outside capital. It means that the business owner relies on her own personal equity to get the ball rolling and then invests profits back into the business. Instead of seeking outside financial support, she depends on cash flow to grow the company.

For most founders, this means the business will be lean at the beginning. There will be little to no assets when the company is just starting out, as the owner will be relying on personal savings, quick inventory turnover, and sweat equity to get the company off the ground.

The question is: Are you better off bootstrapping or obtaining outside funding? Let’s take a look at the pros and cons.

Pros of Bootstrapping

If you have the personal finances to fund your startup and your industry is suited to the low-asset launch of a bootstrap model, there are several benefits to foregoing outside funding.

  • Business Control
    Many investors are not the “silent” variety. They insist on having a voice in how you run your enterprise. If you have a strong vision for the future of your business, you may be hampered by conflicting ideas that do not align with your long-term objectives. Financing your startup on your own leaves total control of the company in your hands.
  • Customer Relations
    Business owners who rely solely on their profits to fund their business growth tend to be more customer-centric that those who receive funding from outside sources. That’s not to say funded entrepreneurs aren’t focused on achieving customer satisfaction; but they have dual objectives: keeping their clients and their investors happy, and sometimes those competing interests are at odds.
  • Long-Term Mindset
    Typically, an investor’s main objective is to turn a profit. The goal is to provide funding to start and grow a business, and then take their profits and move on to the next investment opportunity. This arrangement may include an exit strategy where you sell the business as quickly as possible, allowing you and your investors to cash out and enjoy your proceeds. If this is not your goal, you may want to self-fund your business instead. It allows you to retain control of your timeline and your future plans.

Cons of Bootstrapping

While bootstrapping offers control over your company’s future and flexibility to grow your business on your own terms, these benefits can also be perceived as disadvantages. Here are some of the cons of bootstrapping:

  • Cash Flow
    One the biggest reasons for business failure is anemic cash flow. Bootstrapped businesses can be at risk for underfunding, and that may ultimately lead to the demise of the company. If you can’t generate enough revenue from pre-orders or you don’t have the capital to sustain inventory until your business gets its footing, you may not be able to keep your doors open long enough to see it succeed.
  • Short-Term Mindset
    Similar to the point above, when a company is well-funded, it has the opportunity to create a stronger foundation. Instead of making decisions that lead to immediate cash flow, entrepreneurs with financial backing can afford to create structures and processes that lead to long-term profits, while sacrificing early revenue. Bootstrappers may not have this luxury.
  • Lack of Connections and Advisors
    Investors come with a checkbook. Many of them also come with business experience and wisdom. Their advice and guidance can be invaluable in growing a successful company. They also bring their connections and network to the mix of resources from which you can draw. And while bootstrappers can assemble advisory boards and rely on personal mentors, they do not have the same vested interest in your success as investors.

Is Bootstrapping Right for Your Business?

Financing a startup is not a one-size-fits-all endeavor. For some entrepreneurs, bootstrapping is the logical launching point; for others, it’s not the right path. Determining whether to go it on your own or to seek outside funding requires due diligence and a thorough evaluation of your finances, business plan, forecasts, industry, and market. Working with an experienced consultant who can provide a clear overview of your profit potential and best financing options is key. Schedule a time to speak with a Peek Financial Advisor today.