You have this great idea you are convinced will make for a very profitable business. You set out to convince a few angel investors to help you get started only to be told “no” by every one of them. Now you are questioning whether or not you can even secure a round of start-up business loans. What’s next?
Are you willing to bootstrap your new business venture until it gets off the ground? It might be the only way to go. Believe it or not, plenty of highly successful companies now worth tens of millions were started by entrepreneurs willing to bootstrap. Business loans and private equity may make starting a new business more financially comfortable, but they are certainly not necessary.
Here’s the first thing you need to know right from the outset: start-up business loans, even when available, are unlikely to provide the full funding a new business needs to succeed. Venture capital is generally not accessible unless an entrepreneur has an exceptionally exciting idea capable of convincing investors to open their wallets. So in the end, at least some amount of bootstrapping is almost always necessary to get a new start-up off the ground.
3 Basic Bootstrapping Principles
If you are unfamiliar with bootstrapping as a means of financing a new business, it is really quite simple. Bootstrapping is nothing more than funding a new business with your own financial resources. It is the practice of funding a new business without the help of banks, building societies, venture capital, etc.
In terms of how it is done, there really are no rules. Bootstrapping is all about taking advantage of whatever resources you have available to you. Three of the most common options are savings, home equity, and credit cards.
Tapping into savings is definitely a scary proposition. After all, that money has been set aside to address unexpected emergencies. Cleaning out one’s savings means no more emergency funds. Moreover, the funds you take out of savings is money you may never get back.
Financial advisers on-board with tapping savings to bootstrap a business generally agree that the entrepreneur should not completely drain his or her account. At least a small amount should be left in savings to meet unexpected personal needs.
Home equity is an attractive bootstrapping option because it is capable of raising significant amounts of money. The principle is pretty simple to understand. Until a young company can access start-up loans, the owner uses the equity in his or her home as a funding tool. The more equity in a home, the more money the entrepreneur will have access to. The obvious downside here is that the home behind the credit is at risk. Defaulting could mean the house is repossessed and sold.
Credit cards are yet another way to bootstrap a business. These can be either personal or business credit cards. On the upside, credit cards represent a form of unsecured credit that provides instant access to financing. Credit cards are also revolving credit in the sense that the amount borrowed is not set. The business owner can continue charging to credit cards as long as monthly bills are paid on time.
Bootstrapping Isn’t Forever
The thought of bootstrapping a start-up can be intimidating. Indeed, many would-be business owners have decided to forgo dreams of entrepreneurship because of the fear of bootstrapping. The good news is that bootstrapping is not forever.
Bootstrapping a new start-up is a strategy for getting a business off the ground. It is not a long-term strategy for funding a business. And by the way, it shouldn’t be. If the goal of business is to turn a profit, a bootstrapping owner should eventually start seeing money go back into his/her pocket instead of constantly flowing out of it.
Taking things one step further, a new business starting to show a profit is now more likely to be able to obtain business loans, investment funding, and business grants. Bootstrapping got things started and kept them going long enough for traditional funding to kick in.
So, are you willing to bootstrap your new business? You might apply for start-up loans with no success. You may not be able to convince investors to fund the early stages of your venture. Getting your business off the ground might require bootstrapping until your company is established enough to obtain business financing. It’s not a bad thing, so don’t dismiss bootstrapping without at least considering it.