alternative to self funding bootstrapping

Funding Your Dream: Alternatives to Bootstrapping

10+ min read • May 30, 2022 • Katherine O'Malley

We all enjoy the inspirational stories of a founder who bootstrapped (self-funded) their business to success. But bootstrapping isn’t a sure bet for every business, especially for the long haul. 

Imagine if buying a house required self-funding. You might still be living in your current home. But more likely, your housing situation would look a lot different without a home mortgage.

The same concept applies to businesses. Self-funded companies can and do thrive. However, businesses that leverage the power of financing may have an easier time growing and achieving long-term success.

When Is It Time to Move Beyond Bootstrapping?

Bootstrapping has its time and place. A solopreneur with limited equipment needs, like an accountant or copywriter, may bootstrap forever. Other businesses may be able to self-fund until they reach an “expand or die” tipping point.

How do you know when it’s time to move beyond bootstrapping? Anytime your business is at risk due to a lack of capital, it’s time. 

Other red flags include:

  • Rising personal debt forces lifestyle changes. Choosing between buying your spouse an anniversary gift or a digital ad for your new product is a sure sign that your bootstrapping days are over.
  • Inability to purchase what your business needs to grow or survive. A father/son lawn care business reached that crossroads: invest in a wider deck mower or turn away new clients? They chose to grow their business by financing the new equipment. Bigger equipment meant shorter mowing times, thus more time slots for new clients.
  • Feeling burnt out mentally and physically. If you’re running on empty, it might be time to use financing to turn that side hustle into a full-time gig.
  • Turning down opportunities due to a lack of capital. Imagine a competitor has a “going out of business” sale. Do you have access to capital so that you can snag their deeply discounted equipment?

Alternatives To Bootstrapping

Fortunately, small businesses aren’t limited to bootstrapping for their funding needs. There’s a wide variety of alternatives, which means you’re apt to find one that fits your business requirements.

AlternativeProsCons
External financing (ex: loan, line of credit)

Builds business credit

Some options may not require extensive credit history 

Loans usually have time-in-business requirements
Borrow from friends and familyNo application is required

“Mom, can I borrow a few bucks?”

Doesn’t build credit history

Equity Crowdfunding

Credit scores and business history often less relevant that your pitch

Investors may become instant customers and ambassadors

Creates brand awareness

Give up some control

6−8 months at a minimum before funds can be accessed

Requires disclosing financials to public—SEC, investors, intermediary

Legal regulations/hurdles before, during, and after the campaign

Grants

No repayment 

May target specific businesses or owners

Competitive process

Detailed application and process

No guaranty that applicant will be selected

Private Stock

Formalizes personal network (friends and family) loans

Employee reward/motivation tool (“employee-owned company”)

Lose some company control 

governed by SEC rules 

Generally does not raise large amounts of capital

Business Partner

Brings new perspectives and ideas

Financial risks are shared

Creates a support system

Expands business network

Splits profits and decision making

Partner’s choices could put business at risk 

Angel investor

Favors early stage ideas

“Professional” angels can act as mentors

Requires a rock-solid pitch

Usually requires accepting advice/direction from outside investors

Smaller funding amounts compared to venture capitalist investors

External Financing – What Is It?

External financing is a loan or other financing arranged through a banks, online lenders, or microlenders. Business loan options include:

  • Traditional term loans
  • Flexible financing such as a business line of credit or credit card

Depending on the type of financing, funds may be used for a specific purpose (e.g., equipment purchase only) or be used as needed (e.g., hire employees, smooth out seasonal fluctuations). The loan amount may either be a lump sum or available to draw upon as needed.

Learn more: Securing Business Funding

Borrow From Friends And Family – Why?

Money from friends and family can be easier to get up front and can be structured any way the lender wants, including as:

  • a gift
  • an interest-free loan
  • a low-interest loan

You can usually use these funds for whatever you want, but be sure to treat it with extra respect because you may have to sit next to the lender at Thanksgiving dinner.

Learn more: Borrowing from friends and family

Equity Crowdfunding – What is it?

This is what you’d do on platforms like Kickstarter and GoFundMe to raise money for building your product or service. The lenders in these cases would be regular folks who believe in your idea and want to see it succeed. Securing this money involves:

  • Registering with an SEC-registered intermediary
  • Creating a pitch that outlines what you want to do
  • Giving up micro-percentages of your company

It can take a while to reach your funding goals on these platforms if your idea isn’t a no-brainer winner.

Learn more: Equity Crowdfunding

Securing a Government Grant – Why?

Depending on who you are and what your business is, you might be eligible for a government grant, which you wouldn’t have to pay back. 

  • Visit grants.gov to find grants applicable to you
  • Apply for the grants

Grant money is closely monitored so prepare to report frequently about how and where the money is used.

Learn more: Find Grants

Issuing Stock – Why?

Among the most tried-and-true methods of fundraising, this is where the company sells shares on the open market to investors, employees, and whoever else wants to be involved. It’s relatively frictionless because the entire process is in your control, starting with:

  • Getting a business valuation so you know what a share is worth in a closed market
  • Deciding what kind of shares you want to offer
  • Choosing the market you want to be in

Like with crowdfunding, you’ll have to give up equity in your company.

Learn more: Offer Shares

Take on a Business Partner – Why?

You’d take on a business partner who brings something to the business that you can’t, be it skills, connections, patents, etc. This approach can be tricky if you choose the wrong partner because you’ll have to share:

  • The risk
  • The profits
  • The decision-making

Note that you don’t have to bring on a partner as a true 50/50. You can structure the split however you want.

Learn more: Taking on a partner

Seek Out an Angel Investor – What is it?

An Angel Investor is an individual who provides significant funding in exchange for equity, like on Shark Tank. Angel investors normally seek out early stage companies so they can take a role in bringing the idea to market.

Finding an Angel Investor involves:

Like with crowdfunding, you’ll need a rock-solid pitch: you’re selling the angel investor on your idea.

Learn more: Finding an angel investor

What’s the Best Financing Option For Your Small Business?

The critical thing to remember is there’s no “best” or “worst” option. One option may be the golden egg for one business while it’s the rotten egg for another.

My relatives formed a partnership business to flip houses. The expectation was that some partners would provide sweat equity (upgrading light fixtures, replacing drywall, etc.) while those lacking manual labor skills would give cash for purchases. Profits would be reinvested to buy the next property.

Did the partnership work? Yes and no. Family ties were strained for a while due to a difference in work ethics. The older generation showed up at the crack of dawn to work while the younger generation rolled onsite at noon. The success factors included a small profit that was split after the partnership was dissolved and the ongoing family legends (“Remember that time you stepped through the attic floor and landed in the dining room?”).

And no doubt, everyone has both a horror and success story from family lending. Twenty years after the money was loaned to a relative to start an (unsuccessful) cleaning business, we still hear about the lack of payments. On the other hand, I know a family that regularly loans money to each other for companies ranging from cleaning services to personal fitness consultants. At last count, that family had 4 separate profitable businesses and strong family ties.

Or how about the external financing options? Akinwale Akinsitan, the owner of Aladun Grills, used equipment financing to turn his side-hustle into a full-time business. But a 22-year-old I know has spent 6 months trying to secure a startup loan through a small-town bank.

Whatever the financing source, success depends mainly on realistic expectations, a sound strategy, and a solid business plan.

There’s Always More Than One Financing Option

Funding and jigsaw puzzles have a lot in common—each piece that is put in place lays the groundwork for the next round. 

You secured a grant due to your solid business plan. You diligently tracked and reported on fund usage. Fast forward a year. That same business plan and your proven accountability could be used to pitch your goals and objectives to an angel investor.

And, just like puzzle pieces, if one financing option doesn’t fit your needs, try another one. Imagine a pet grooming business expanding into mobile services. A new truck could be financed via equipment financing or a traditional loan. The “best” option would depend, in part, on that business’s history, credit score, and other factors.

What if that business was a pet grooming startup with a novel twist, say, combining dog wash services with manicures for the waiting humans? In that case, the “best” financing may be an angel investor with a soft spot for fluffy dogs.

Just like there’s no perfect business idea, there’s no one “right” financing option. The key is to recognize when your business could benefit from financing and make it happen.

****

The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. The views and opinions expressed in this blog are those of the author and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.

SHARE

Katherine O'Malley

Katherine O'Malley is a contributor to the Lendio blog. A technology geek at heart, she splits her time between traveling, freelance writing, database administration work, and implementing SEO on her travel blog. In her free time, she loves to research the challenges small-to-midsize tourist suppliers face and find ways that technology can help them out.