When you’re first starting a business, one of the first things you’ll need to do is figure out how you’ll fund it. There are plenty of options — from crowdfunding to loans or grants. But the simplest way is to bootstrap your business, or self-fund. Bootstrapping may feel risky, but with the right strategy and smart saving, anyone can make it wok.
What does it mean to bootstrap a business?
Bootstrapping a business means using personal savings and your business revenue to fund and grow your operations. Bootstrapped businesses don’t rely on other sources of funding like angel investments, venture capital money, loans or other forms of debt.
Benefits of bootstrapping
Bootstrapping is a quick and simple way to fund your business because you’re using money you already have. You don’t have to apply for anything or wait around for approval like you would with a grant or loan. You also don’t have to worry about being on the hook for paying anything back to a lender, as is the case with applying for business loans or business credit cards.
Another pro is getting to keep all the equity in your business. If you’re a startup seeking outside funding like venture capital or angel investments, you’ll have to give up some of the equity in your business in exchange for funding. The money can go a long way to helping you grow your business by allowing you to pay for the costs of hiring new employees, paying for the things you need to operate and more. But if you don’t accept outside investments, you (and any co-founders you have) retain all your equity.
Whether you see this as a pro or a con, bootstrapping can also force you to become really creative and strategic about how you spend money on your business and find ways to keep the cash flowing. Some founders work part-time for an employer so they can earn money to grow their business. Founders also find ways to avoid business expenses that feel more like nice-to-haves rather than needs for as long as possible.
Challenges of bootstrapping
The biggest caveat to bootstrapping is the personal risk. Because you’re using personal money (i.e., savings, investments, emergency fund) to pay for business expenses, there’s always the possibility that you’ll run out of savings to contribute. And if your business isn’t earning any revenue yet, this can put you in a sticky financial situation until you’re able to pay yourself from your business.
Because of this, bootstrapping may be most ideal if you know you already have significant savings to keep your business (and personal life) afloat, especially if you plan to quit your job to work on your business full-time.
Strategies for bootstrapping
No method of funding a business is perfect; they all come with their draws and drawbacks. But as with any other method for funding your business, careful planning can help you get ahead of potential snags and keep your head above water.
Avoid quitting your job for now
There’s no easy way to say this but whether you choose to stay or leave your job to build your business, both options come with trade-offs. If you quit your job to focus on bootstrapping the business, you’ll have less cash on hand to pay for daily living expenses and you’ll have to make your savings stretch between the business and your living expenses. And if you keep your job, you’ll have more financial flexibility but you won’t have as much time to work on your business and it could potentially take longer to reach certain business goals.
However, if you’re very averse to financial risk and think that quitting your job will do more harm than good for you mentally and financially, it may be best to hold onto your job to help you bootstrap your business. You can revisit the idea of quitting your job when your business feels more stable.
Create a sinking fund for business expenses
Opening a savings account that’s specifically for business expenses can help you stay organized with a plan for where you’ll get the money for your business. That way, you don’t have to immediately default to raiding your investment accounts or other important savings prematurely.
You can open up a personal high-yield savings account to get started before you even launch your business. The Marcus by Goldman Sachs High-Yield Online Savings account doesn’t charge any fees and doesn’t have a minimum deposit to open the account. The Ally Bank Savings Account is another popular account with similar features.
Marcus by Goldman Sachs High Yield Online Savings
Goldman Sachs Bank USA is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
At this time, there is no limit to the number of withdrawals or transfers you can make from your online savings account
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Excessive transactions fee
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- No limit on withdrawals or transfers
- Easy-to-use mobile banking app
- Offers no-fee personal loans
Cons
- Higher APYs offered elsewhere
- No option to add a checking account
- No ATM access
Ally Bank Savings Account
Ally Bank is a Member FDIC.
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Annual Percentage Yield (APY)
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Minimum balance
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Monthly fee
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Maximum transactions
10 withdrawals or transfers per statement cycle
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Excessive transactions fee
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Overdraft fee
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Offer checking account?
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Offer ATM card?
Yes, if have an Ally checking account
Pros
- Strong APY
- No minimum balance or deposit
- No monthly fees
- Option to add a checking account with ATM access
Cons
- Higher APYs offered elsewhere
- $10 excessive transactions fee
Come up with a business budget
Knowing exactly how much you’ll need to spend on your business every month will help you avoid surprise bills and allow you to prioritize which expenses are worth spending on now versus which ones can wait until you have more flexibility.
Other ways to fund your business
If bootstrapping doesn’t sound like your cup of tea, there are still a few other ways to get money for your business operations.
Grants
A grant is money awarded by an organization that doesn’t need to be paid back. Business grants are usually offered by government organizations, corporations and nonprofits. However, they are notoriously tough to get sometimes because recipients will usually need to meet certain eligibility criteria to receive funding and maintain those requirements. It can also sometimes take a while to hear back on the outcome.
Crowdfunding
Crowdfunding involves raising small amounts of money from a large pool of people through a “campaign.” With this campaign, you set a total fundraising goal and the small contributions help you reach that goal. Usually, you’ll need to reach that goal within a specified time limit or else you’ll need to return any funds given to you.
Indiegogo is one popular rewards-based crowdfunding platform. It collects a 5% fee on successfully funded campaigns, but won’t charge you if you don’t hit your fundraising goal.
Indiegogo
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Cost
5% of total funds raised; payment processing fee of 3% + $0.20 per pledge
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Standout features
Project categories offered include energy and green tech, film, health and fitness, video games, home, audio, phones and accessories and travel and the outdoors.
Small business loans
Small business loans are pretty much just like any other installment loan: you submit an application and if you’re approved, your lender gives you a lump sum of money that you’ll pay back in fixed, equal amounts over a certain period of time plus interest.
If you need a loan to launch your business, opt for lenders with lower requirements since most lenders provide funding to businesses that have been active for at least six months and earn an average of at least $15,000 per month.
Kiva is one lender that may have slightly more lenient requirements. It’s a non-profit that provides microloans of up to $15,000, however, businesses will need to crowdfund the loan from friends, family and Kiva’s network of lenders. Plus, Kiva’s only requirements are that you must be at least 18, live in the U.S., use this loan for business purposes and not currently be in foreclosure, bankruptcy or have any liens.
Kiva
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Types of loans
Peer-to-peer crowdfunded loan
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Loan amounts
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Terms
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Minimum credit score
No credit score requirement
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Minimum requirements
You must be 18, live in the U.S., use the loan for business purposes, not be in foreclosure, bankruptcy or have any liens.
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Availability
Available nationwide except for businesses registered in Nevada or North Dakota.
Pros
- Ability to borrow with no interest
- Loans are geared toward borrowers who are unbanked and have trouble qualifying for financial products
- Ability to market your product to 1.6 million lenders on Kiva
Cons
- You need to prove your creditworthiness by inviting friends and family to lend to you
- It can take a while to receive your loan since investors need to raise money
- No BBB rating
However, if you’re a bit further along in your business, another lender to consider is Credibly since this lender considers credit scores as low as 500 but allows you to apply for as much as $600,000. You will need to have been in business for at least six months and have an average monthly revenue of at least $15,000 to qualify.
Credibly
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Types of loans
Long-term loans, working capital loans, business line of credit and merchant cash advance
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Loan amounts
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Terms
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Minimum credit score
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Minimum requirements
Must have been in business for at least six months and have an average monthly revenue of at least $15,000
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Availability
Credibly offers business loans in all 50 states and Washington, D.C.
Pros
- Approval within four hours
- Low minimum credit score
- Loan amounts of up to $600,000
- Funds deposited as soon as the same business day
- Considers overall business health for approval
Cons
- Requires average monthly revenue of at least $15,000
Should you bootstrap your business?
Bootstrapping is a straightforward way to run a self-sustaining business but you also run the risk of blowing through all your personal savings. It can be especially nerve-racking if you don’t have any other source of income to keep you afloat.
Bootstrapping may be a comfortable option for you if you have a solid nest egg that you’re fine with pulling from to fund your business, and if you’re comfortable with the idea of that nest egg being totally drained.
You can still create a plan to bootstrap your business, which can involve setting up a separate sinking fund for expenses before you even launch your business.
FAQs
Does bootstrapping cost money?
Bootstrapping doesn’t “cost” anything per se, but it does involve using personal money (savings, investments and other personal assets) to fund business operations.
What are some ways to cut costs while bootstrapping your business?
If you’re looking to cut some costs from your personal budget to make bootstrapping easier, consider cutting any subscriptions you haven’t used in a long time. You don’t have to completely cut out spending on “fun” things like dining out with friends or coffee but reducing the amount you spend or the frequency at which you spend in these areas can go a long way to saving you extra cash. Another way many founders cut costs is by moving back in with their parents so they can completely get rid of rent as an expense and save that cash for their business.
When should you stop bootstrapping?
The decision to stop bootstrapping depends on the situation but it can be a good idea to abandon this strategy if you’ve already used up all of your personal money (or are getting dangerously close to doing so) and can no longer fund your business on your own, or if your need for growth far outweighs your personal ability to reach that growth without external money.
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