Business Loans

The Allure and Danger of Bootstrapping

Apr 25, 2022 • 6 min read
bootstrapping small business finances
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      We all love to celebrate a founder who bootstrapped their way to the top. 

      • MailChimp was built in-house by a design agency. 
      • Sara Blakely funded Spanx with $5,000 of her own money, got into Neiman Marcus and never looked back. 
      • And the GoPro guy (Nick Woodman) moved back in with his parents to get his now-billion-dollar company to its initial public offering. 

      Many early stage entrepreneurs buy into the allure of being the next bootstrapped billionaire. A few of them actually make it, too. But behind every bootstrapped business is an owner who may be putting their business’s health at risk.

      What is Bootstrapping?

      Bootstrapping is self-funding your business. You use your own savings and earnings to keep the business afloat—through the highs and the lows—in the hopes of achieving success without a business loan or early stage investors. To fund business expenses, bootstrappers tap into money on hand, including savings and personal credit cards, as well as 401Ks, second mortgages, and, of course, reinvesting their income. They may also work a day job while they grow their small business at night, or vice versa.

      Why Would a Founder Bootstrap Their Company?

      You have an idea. It’s good. And when that idea is to start a business, it’s not unusual for the business owner to turn to the easiest-to-access resources: their own funds. In fact, getting a startup loan often requires a 6-month history in business (there are, however, other financing options beyond loans). So it can make a lot of sense to self-fund a business, at least for a while. 

      Additionally, there are some very small businesses that legitimately don’t need outside capital. Non-medical professional services firms are a good example. A solopreneur lawyer, accountant, copywriter, or talent agent might only require a laptop, website and cell phone. A family business where each family member contributes to the final product and sales may be able to support itself. However, in both of these cases, growth may be limited.

      Benefits of Self-funding? Full Control of Decisions.

      Self-funding a business allows for complete control of operating and growth decisions, which comes in handy in the following situations:

      • You have a client you want to drop. If you’re self-funded, the only person you need to convince that you should fire that client is you.
      • You see an opportunity you want to pursue, like a service-for-equity situation. The most famous example of this is the artist who took shares as payment to paint Facebook’s first office. His share wound up being worth over $200 million.  
      • You have personal values or beliefs that you’re not willing to compromise. This was the case with Chick-fil-A. In fact, the founder has forever forbid the company from going public so it continues operating within its founding principles.
      • The dream of DIYing everything is strong. It’s hard to ignore a great story of founders who grew an entire business themselves. Look at Gorilla Glue, which is still a family business, and Qualtrics, which was self-funded by two brothers for 10 years before selling for $8 billion in cash.  

      Dangers to Bootstrapping Your Company

      Allure aside, self-funding a company can be an uphill battle. One batch of supplies for a big project can exhaust a savings account, particularly when high inflation chips away at your budget, and running a full business as a side-hustle can only take you so far. Those, BTW, are just the tip of the iceberg. Here are some other things you risk:

      Burning Out

      Burn-out is probably the most common danger of self-funded companies because it can lead to serious mental or physical health problems. And it’s not just burnout from long, lonely hours. It’s the stress of liquidating your investments, not getting the deal you were banking on, or simply having no time to yourself. This is particularly risky for business owners who work a day job and build their business during their off hours. While growing a side hustle into a full-fledged business can be done successfully, continuing this way too long can be hard to bear.

      Running Out of Money

      It would be great if money were an unlimited resource. But it’s not. And unexpected expenses or increases in costs can wreak havoc on the best budget. The biggest shock? Sometimes it comes simply from the increased expenses associated with growth. Emergencies like property damage, illness, or other unexpected shutdowns can also thwart the best-crafted plans. If the only fallback is a personal savings account, staying in business may not be practical. Running out of money is one of the main reasons small businesses fail.

      Not Having the Money to Take Advantage of Opportunities

      A lack of capital can limit growth and the ability to seize opportunities, launch products, and take chances. For example:

      • You may not be able to upgrade your factory without equipment financing. If you turn it down, your competitor will take it, upgrade their factory, and leave you in the dust. 
      • You may be forced to let your best employee walk without taking a business line of credit to offset their new salary demands as your revenue grows. If you don’t pay them what they want, you’ll be down irreplaceable talent that will eventually affect the customer experience.
      • And what if you’re invited to pitch what could wind up being your best client, but you need $20K to do it properly? Without a short-term loan, you may have to pass and always wonder what could have been.

      There Are Solutions

      So what do you do when you’re starting a business but don’t have a large cash reserve? Bootstrapping is still a great option, but you may also want to consider investors or partners, too. Additionally, there are financing options available to newer businesses, too, that can help a business owner take advantage of opportunities as they arise or even simply be prepared – just in case the money in the self-funded bank account starts to run a little low.

      Lendio facilitates financing for small businesses, including SBA loans, lines of credit, cash advances, and more. You can find out what your business may be eligible for by completing the short, 15-minute, online application.

       

      Disclaimer: 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.
      About the author
      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.

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