Traditional funding options versus self-funding strategies
When starting a business, traditional funding options may be difficult to obtain due to eligibility requirements. Many lenders prefer to lend to established businesses that have been operating for at least a year and generate a specific amount of revenue. That is when bootstrapping is a great funding alternative – when loans are inaccessible.
So, what exactly is bootstrapping?
Bootstrapping: It means using your own personal funds and resources to start and grow your business, rather than seeking external investments or loans. It’s also known as self-financing and self-funding.
Not everyone is in the position to be able to self-fund their business dreams, but if this is a possibility for you, then keep reading to find out what you should consider when looking at this option.
Pros of bootstrapping
One of the major advantages of self-funding is the level of control it provides over your business. Unlike obtaining funds from investors, self-financing enables you to retain sole decision-making authority and avoid interference with your business plan. Bootstrapping minimises or eliminates the need for external financing, reducing costs associated with interest payments or repayment obligations. This can lead to higher profitability and improved cash flow.
Cons of bootstrapping
One the major disadvantages of self-financing is the high risk that comes with it. Bootstrapping carries a higher level of risk as you are solely responsible for funding the business’s operations and managing financial uncertainties. This can restrict your ability to invest in growth opportunities, expand operations, or hire additional staff. Finally, you may be sacrificing personal financial security and stability. Bootstrapping can require significant personal investment, including time, effort, and personal finances, which may have an impact on your personal life.
The idea of “Bootstrapping” started with the phrase, “To pull oneself up by one’s bootstraps,” back in the 1800s and it referred to working at an extremely difficult task.
Doing bootstrapping the right way
Bootstrapping requires you to be smarter with how you spend your limited funds. For instance, you can use suites of software like Office 365 and Google which have many additional tools included. That allows you to cut down on paying for extra tools and carrying unnecessary monthly subscriptions.
It is important to create or establish the product/service you are selling quickly so you can earn revenue from business sales to provide immediate cash flow. Cash flow is essential for the survival and sustainability of a bootstrapped business. By having a product that can be sold immediately, you can start generating revenue early on, which helps cover expenses plus allows you to reinvest in the business, and reduce reliance on external funding or personal savings.
Temporary limits on your business
Another bootstrapping option is to temporarily limit your business, which helps to reduce costs early on. For instance, you could focus on producing a smaller variety of products, or focus on sales in a limited geographic area, or produce on-demand, rather than maintaining stock. You can slowly expand your business from there.
Ultimately, the decision to bootstrap your business depends on your specific circumstances, risk tolerance, and long-term goals. While bootstrapping offers advantages like control and cost savings, it may limit growth potential as well as carries increased risk. Careful planning, financial discipline, and strategic decision-making are crucial when bootstrapping to maximise the benefits and mitigate the drawbacks.
Are you ready to look at funding options for your business? Contact us – we are happy to discuss funding strategies with you.
We also offer a Client Advisory Board service – a great resource for every business. You get industry experts in your very own board of advisers, ready to work with you on funding options, problem-solving or discussing strategies to help make your business a success. To learn more about this exciting service, download our Client Advisory Board guide.