There are several ways to fund a small business including taking out a loan, applying for a grant and receiving capital from investors. Another alternative is bootstrapping. Here’s what small-business owners need to know about what it means to bootstrap a business and the pros and cons of this alternative means of funding.
What Does Bootstrapping Mean?
You may be familiar with the phrase “picking yourself up by the bootstraps.” Essentially, this refers to the act of doing a task on your own without any help.
Bootstrapping a business means you are self-funding the company. There is no third party involved in funding the business, like an investor or a bank. Business owners who bootstrap use their own resources to pay for their startup’s expenses. Some of these may include personal credit cards, dipping into savings or retirement accounts and even utilizing physical spaces, like garages or spare rooms in a home, to grow the business.
Have any well-known small businesses started out by bootstrapping? Yes! One of the most famous is the email marketing platform Mailchimp. Co-founders Ben Chestnut and Dan Kurzius started the company in Atlanta on a bootstrapped budget. In 2021, Mailchimp was acquired by Intuit in a $12 billion deal — a massive payday and incredible success story for a bootstrapped small business.
Pros of Bootstrapping
What are some of the biggest benefits of bootstrapping a small business?
Ownership
Bootstrapping a business means you retain full ownership of the company. This differs significantly from other forms of funding, such as investors who must receive a stake in the company equity or a percentage of ownership in exchange for capital.
Good Spending Habits
It is possible to develop good spending habits as a result of bootstrapping a business. Owners will pay careful attention to where their hard-earned money is going. If a certain activity does not provide a return on investment or generate revenue for the business, the owner may stop spending money on this activity immediately and reprioritize funds.
Sense of Accomplishment
Bootstrapping is not an easy task. Entrepreneurs who can do it, and stick to their budgets, will not only feel a sense of ownership when all is said and done. They’ll feel great pride in knowing they financed their small business from scratch and turned their dream into a reality.
Cons of Bootstrapping
On the flip side of the coin, here are a few cons to pay attention to if you plan on bootstrapping.
Limited Funding
Successful bootstrapping depends on the entrepreneur’s financial situation.
Some business owners have an excellent cash reserve in savings to dip into for financial aid. Others might have much less. If you don’t have much savings or money, you may be more limited in how you are able to finance your small business. Additional spending you cannot cover may require the assistance of an external resource like taking out a loan or using a personal credit card. If the business owner does not manage their external finances carefully, they may struggle to pay back the loan or get into credit card debt.
High Risk
The success of a small business hinges on its ability to generate revenue. If your small business is already generating or proven to generate revenue through its products or services, business owners may feel more at ease bootstrapping the company.
Small businesses struggling to earn money, however, may be more at risk of reaching their full potential. This may force business owners to reconsider if they are willing to put their savings or funds toward the business or explore another funding option.
Bootstrapping Isn’t Easy
Successful bootstrapping requires business owners to be disciplined in their spending, saving and budgeting habits. There’s also not a specific start and stop timeline for bootstrapping a business, meaning you may need to retain a financially frugal mindset for longer than you may prefer. If you struggle with money management, you may find it incredibly difficult to bootstrap your own company.
Should I Bootstrap My Business?
Entrepreneurs unsure of whether they should bootstrap their business or opt for another form of funding are recommended to meet with a financial advisor. A financial advisor will help address any questions you may have about bootstrapping and review your overall financial picture with you to determine if you should do it or explore another alternative.
