The year 2023 is shaping up to be difficult for small businesses. In March, both Silicon Valley Bank and Signature Bank collapsed following a run on assets. The Federal Reserve also keeps raising interest rates, with current rates at 4.75%-5.00%.
All of these financial stressors add up to a banking climate that is lending less. The Federal Reserve Bank of Dallas surveyed banks in Texas and found lending was down 18.3% in the first quarter.
If businesses can’t get money from banks or venture capital firms, more small-business owners might need to turn to bootstrapping.
What is bootstrapping?
Bootstrapping comes from the old adage of pulling oneself up by their bootstraps. For entrepreneurs, it means your startup funding doesn’t come from a bank or outside investors. Instead, you provide all the funding.
And while bootstrapping a startup is difficult, it comes with benefits like retaining complete control over your company.
Bootstrapping means no traditional bank loans, and it also means no venture capital or external funding borrowed from friends, family, or angel investors in exchange for shares. As a bootstrapper, you’re coming up with the funds for your business without exchanging any equity.
Instead, founders fund their business using personal savings, earnings from a different job, or another source of income, like a rollover for business startups (ROBS).
A ROBS is a type of funding that draws money from your existing 401(k) retirement account to fund your startup, making it popular with older entrepreneurs. According to Guidant Financial’s 2023 Small Business Trends survey, 52% of the small-business owners they heard from financed their businesses with one.
Only 19% of Guidant Financial’s survey respondents said they financed their business with cash. So, self-funding your own business doesn’t necessarily mean you have to have a lot of money at your disposal.
How to bootstrap a startup
Choosing to bootstrap a startup is a big decision. First, you should make sure it makes financial sense for your business and yourself.
Consider if it’s financially practical for your business
If your business idea requires expensive equipment like a professional-grade 3D printer or industrial machinery, bootstrapping may not be a good option for you. Expensive assets require a lot of capital, which might make it difficult for an individual to fund.
In general, bootstrapping might not be feasible for businesses with large upfront costs, unless you have significant savings.
Bootstrapping is more closely associated with software-as-a-service (SaaS) companies because those businesses generally have predictable revenue models. SaaS companies like Mailchimp and GitHub are examples of successful startups that were bootstrapped.
It’s important to note that even if you can get a personal loan for some of these expenses, you should decide if this is something you’re comfortable with. You might be fine spending $50k of your own savings, but would you take on personal debt to fund your early-stage startup too?
If this is a personal loan, you would be liable for any losses. You need to look at your personal finances at the same time and decide how much liability you’re willing to take on.
Make a detailed plan to stay on top of things
You’ll want to have a very detailed business plan if you’re going to bootstrap your startup.
Your plan should include backups and alternative financing ideas if bootstrapping doesn’t work. You’ll be much better prepared to allocate resources appropriately if you have a plan for dealing with ups and downs in cash flow.
Cash flow is one of the more difficult aspects of bootstrapping. If you don’t have a bank loan or additional financing to fall back on, it may be difficult to pay your bills when you start out. You’ll need to figure out ways to save money and get things done on a tight budget quickly to stay operational.
If you set up your business with this in mind, you’ll be more prepared. For example, you might need to negotiate more with vendors, or go with cheaper material than you’d like at first to keep costs down.
A business plan will also help you figure out if you need to keep a day job. You’ll be able to supplement your earnings and pay your personal expenses if you work a day job, but that also means you’ll have less time to dedicate to your business.
While it may seem like the odds are stacked against you, there are many success stories. For example, Shopify, the SaaS ecommerce giant, was funded primarily by co-founder Tobi Lütke for its first few years. He grew the company to 24 employees and roughly $438k in monthly revenue before seeking outside investors.
The pros of bootstrapping your startups
Bootstrapping means you have complete responsibility and ownership. You don’t have to get additional investments approved, and you’ll have less interference with your choices. This can end up saving you time and money
Ben White, co-founder of research software provider SurveyEngine, has bootstrapped his business since 2001. But he has also worked at multiple startups that were funded using investors. “When you work with investors, rather than the voice of the market shaping the growing business, the voice of the investor dominates.”
Despite the challenges, White is glad his current company is self-funded. “Having no easy access to funds means always taking personal responsibility.”
Since you’ll be more focused on costs, you may be forced to create a sustainable business model sooner rather than later. What doesn’t work or isn’t profitable will have to be abandoned quickly.
Bootstrapping your startup also means you don’t have to worry about large bank loans looming over your accounts, or constantly updating or attracting new investors.
The cons of bootstrapping startups
Since bootstrapping means you have to raise funds yourself, it can take longer for you to come up with it.
As Gene Caballero, co-founder of GreenPal, a lawn care service software, notes, “It took us three years to get our product built. With an investment, we probably could have cut that time down to six to eight months.“
When you decide not to pursue outside investment, you might have to wait before you can launch new products. It can also mean you won’t be able to hire new workers right away or will have to carry a smaller inventory.
And while you won’t need to worry about large loan repayments, money will still be a constant concern. Until you’re reliably bringing in steady revenue, you’ll have limited cash to work with. Sudden expenses could have a big impact on your operations, and you’ll have to put in a lot of sweat equity.
Bootstrapping a startup can be a financial risk too. You’ll be losing your own money if things go south, especially if you took out a personal loan.
If you’re thinking about bootstrapping a startup, you need to do a lot of research. Start by learning all about startups and what you should consider before starting your own business.