How to Bootstrap Your Startup
For many new business owners, traditional business financing, like bank loans, are out of reach. Instead, some startup entrepreneurs bootstrap, using their own resources to build a business.
Bootstrapping is a way of providing your own financing for your business. If you’re thinking about self-financing a new business, we’ll lay out what you need to know to bootstrap your startup.
What is bootstrapping?
Bootstrapping means relying on your own finances to start a business without the help of loans or outside investors. It’s commonly associated with startups that cobble together their own financing when first starting out.
Many startups aren’t eligible for business loans, as they lack a financial history. Entrepreneurs typically do not want to give away ownership to investors, so bootstrapping becomes the primary financing option. When bootstrapping, you can rely on your own savings, money from friends and family and maybe even business crowdfunding to bootstrap your business.
When bootstrapping a startup, you need to earn enough income to support your lifestyle or family. To maintain financial stability while bootstrapping, you could work a full-time job and develop your own business in your free time. You could put money away until you’re ready to fully commit to your venture.
Is bootstrapping right for you?
Financing your business yourself can help you avoid the complications of working with investors or getting a startup business loan. Bootstrapping might be a viable option if you have substantial personal savings and minimal existing debt. However, you need to understand the risks involved. Using your personal funds means you could lose your savings if the business fails or doesn’t generate the expected returns.
Bootstrapping can also be a strategic move if you plan to attract investors later. By self-financing the startup phase, you can develop your business to a point where it’s more appealing to investors. Startups often struggle to attract investors due to a lack of immediate returns. A stable, established business is more attractive to investors and more likely to be able to negotiate favorable rates and terms on business loans.
Pros and cons of self-financing a business
For many startups, bootstrapping may be the only financing option to get the business off the ground. Here are some positive and negative aspects of self-financing.
| Pros | Cons |
Maintaining full ownership. Bootstrapping allows you to remain in complete control of your business rather than giving a percentage of ownership to investors. Increasing your business savvy. When self-financing your venture, you’ll likely be on a tight budget, which can have the effect of imposing discipline. You’ll have to figure out how to run your business in a cost-effective way. Improving your chances of getting a business loan later. Pouring your resources into your business can increase your chances of being approved for a business loan in the future. The experience you gain as the company becomes more established makes you a more attractive borrower. Lenders prefer — and sometimes require — experienced business owners who have put their own equity into the company. Fully investing in your business. You can put all the money you raise through bootstrapping into your business. You don’t have to put money towards loan payments or returning profits to investors. | Risk of falling short. You may need more money to meet your needs, or you may not turn a profit as quickly as you expected. Underestimating costs. If you don’t calculate the correct business costs, you may not save enough money, which could put your cash flow at risk. Missing out on valuable relationships. Although investors take away from your full ownership, they offer intangible benefits in addition to money, such as mentorship and business connections. You may miss out on helpful relationships when you bootstrap. Slow business growth. You probably won’t raise as much money through bootstrapping as you would if you brought on investors or took out a bank loan. Starting with less money may inhibit how fast your business can grow. |
7 steps to bootstrap your startup
Successfully bootstrapping your business involves careful planning and strategic steps. Here’s a guide to get you started.
1. Figure out your budget
First, determine how much you can safely spend from your savings without jeopardizing your financial stability. If your savings won’t cut it, look within your personal network for funding.
Friends and family members may be willing to put money into your business. If you accept help from friends and family, make sure they know whether this is a donation, a loan, or an investment into your business. If things don’t work out, you could end up harming those relationships.
2. Create a business plan
Your business plan should detail your goals, target market, marketing strategies and financial projections. Given limited funds, consider starting small and scaling up gradually. For example, your ultimate goal might be to open a restaurant. However, beginning with a food truck or a stall at the local farmers market allows you to test your concept, build a customer base and generate revenue before committing to a larger investment.
Your business plan should be flexible, allowing for adjustments based on actual performance and market feedback.
3. Create your minimum viable product
A minimum viable product (MVP) is a simplified version of your product or service that meets your customers’ basic needs. Creating an MVP allows you to enter the market quickly and gather valuable feedback without an extensive initial investment.
When creating your MVP, focus on the core features that solve the main problem for your target audience.
For example, if you want to start an online fitness coaching business, your MVP might be a YouTube channel with several workout videos. Once you attract viewers and subscribers, you can encourage them to sign up for an eight-week challenge that eventually leads to personal coaching.
Gathering feedback from early followers and participants can help you make informed decisions on improvements and expansions.
4. Project your cash flow and costs
Now that you know how much startup capital you have to work with and what your MVP is, it’s time to project your monthly cash flow to see how much money you expect to spend compared with how much income you expect to generate.
Start by listing all expected expenses, including one-time startup costs and ongoing operational expenses. Next, estimate your revenue based on market research and sales projections. You may need to go back and re-tool your business plan and MVP to ensure your costs fit within your current budget.
Create a detailed cash flow forecast that outlines when you expect money to come in and go out. This will help you identify potential shortfalls and to plan accordingly.
Update your projections regularly to reflect actual performance and adjust your spending as needed. Keeping a close eye on cash flow ensures you have enough funds to cover expenses and helps you make informed decisions about scaling, marketing and other business activities.
5. Start marketing early
Early marketing helps build awareness and generate interest in your startup. Use free resources like social media platforms to reach a broader audience without a lot of costs. Create engaging content to highlight your product’s value and encourage sharing.
Networking is also essential. Tell everyone you know about your business and leverage their networks for referrals. Consider starting a blog or participating in online communities related to your industry to establish yourself as an expert and attract potential customers.
6. Open up your business (and re-evaluate)
Once you’re ready, launch your business and be prepared to adapt. Regularly review your budget and business plan to ensure you’re on track. If things aren’t going as expected, don’t hesitate to make necessary adjustments. But resist the temptation to expand your budget too quickly — even if you experience early success. Remember, financial discipline is still essential, and you don’t want to overextend yourself. Continue to evaluate profits and manage cash flow, as these are the keys to sustainable growth.
7. Scale up
As your business gains traction, consider scaling up cautiously. Reassess your business and personal finances to ensure you can support the expansion without risking your financial security.
Gradual scaling allows you to test new markets and products without significant upfront costs. Scaling should be a deliberate process that balances growth opportunities with financial stability.
When to take on debt
Bootstrapping is a great way to start a business, but there may come a time when you need to take on debt to grow and expand. Here are a few situations when taking on debt might make sense.
- Expansion needs. If your business is growing and you need to buy new equipment or upgrade existing infrastructure to meet existing demand, a small business loan or line of credit can provide the necessary capital.
- Leasing space. When you outgrow your home office or initial location, leasing a larger space can help accommodate growth. Debt financing can cover the costs of moving and setting up a new location.
- Inventory management. Purchasing inventory in bulk can reduce costs or help you prepare for peak seasons. A business loan allows you to manage this large cash outlay without straining your cash flow.
- Hiring staff. Expanding your team to improve operations or generate additional revenue may require additional funds. Debt can help you cover the cost of hiring and training.
- Research and development. If innovation is an essential part of your business, funding for research and development can help you stay competitive. Debt can provide the funds you need for these initiatives.
