In the real world, the vast majority of new businesses are bootstrapped. According to the U.S. Chamber of Commerce, 78% of small businesses use their own funds to start their businesses.
Nearly 500,000 businesses are started every single month. Only about 6,000 of these startups will get angel investment, and fewer than 500 will attract venture capital. On top of that, banks lend SBA-guaranteed loans to fewer than 100,000 businesses per year, often requiring things like your house as collateral.
So, while still attainable, the reality is that most startups and small businesses don’t get outside funding—the vast majority are bootstrapped.
What is bootstrapping in business?
To pull yourself up from your bootstraps is a romanticized saying that describes when an entrepreneur starts a business with little to no capital and doesn’t rely on borrowed money. It often means that your business is self-funded through personal savings or that you are immediately investing operating income right back into your business.
Some experts say it’s still bootstrapping when somebody uses borrowed money (loans) as long as it is backed by their own personal assets. In that scenario, the entire risk and ownership remains with the business owner.
How to bootstrap your business
A bootstrapped company functions very similarly to one that’s funded. The main differences are you’re typically doing more on your own, leveraging as many existing resources as possible, and potentially growing at a slower rate.
To help you truly bootstrap your business, here are the necessary steps you should take.
1. Understand your startup capital needs
The reality is that some business types will be harder to start with nothing. These businesses usually require a high upfront investment for equipment, inventory, rent, or other initial expenses. To stick with bootstrapping you can look to invest your own personal funds or connect with a partner to assist with these initial purchases.
As an alternative, you can also avoid starting a business that requires higher startup capital and instead consider a service-based or online business. Or if you’re set on starting a business that needs extensive funding to get off the ground, approach the startup process slowly and make it a side hustle. That way you can scale and invest at a pace that doesn’t require outside investment.
2. Create a business plan
Once you have a business idea in mind it’s time to put together a business plan. We recommend using a one-page plan to make the writing process quick and easy. And since you’re focused on bootstrapping, it’s the perfect tool to consistently review and revise as you get your business off the ground.
The main things for you to focus on when bootstrapping are your financial plan, your marketing plan, and sales channels. You need to understand your business numbers (specifically cash flow) right from the start and have a plan to generate revenue. This will give you an idea of how long it may take to become profitable, how much cash you have and are using, and how risky specific decisions may be.
Need funding?
Create a business plan that maximizes your chances of securing funding.
3. Identify resources
Even if the business you start requires little to no capital—you still need to identify where specific resources will come from. Are you using your own equipment and cash? Renting out assets or services? Planning to build up cash to invest back in before truly pursuing growth?
Be sure that you have answers to these questions. The better that you understand what type of personal assets you’ll use and how and where you’ll pull together additional resources—the more prepared you’ll be to run your business.
4. Test your idea early on
Now, one thing that can sink your business early on is lacking market fit. This means that there are simply not enough interested or attainable customers to support your business. And when you’re self-funding and potentially using personal finances, realizing this too late means you’re losing cash from your own pocket.
To avoid this, get out and talk to customers as early as possible. Survey them, develop a minimum viable product, take pre-orders—do anything that helps you determine if your idea has merit. Ideally, you’ll do this before ever investing anything and be able to bring in some sort of initial revenue to get you started.
5. Keep an eye on cash flow
We mentioned this before but one of the most vital things to track is your cash flow. Cash is the lifeblood of your business. If you don’t understand how much you have, how much you’re using, and when you’ll run out—your business won’t survive.
When bootstrapping, looking at your cash can give you a better idea of when to take cash out, when to push for growth, and if you need to bring in more personal funds or consider other funding options.
6. Invest back into your business
If you’re bootstrapping, you want to avoid consistently investing personal funds and make your business sustainable on its own. To do this, you need to focus on retaining revenue and driving it back into your business. Again, a big part of this is understanding your cash position and understanding when and how much you can use to drive growth.
Additionally, you should be planning out how revenue will be used ahead of time and reviewing your performance to determine if any changes should be made. To do this, revisit your one-page plan, review your milestones and financials, and determine if you’re still on track or need to adjust course.
Ways to bootstrap your business
Bootstrapping doesn’t necessarily mean building a business from nothing. There are plenty of methods to bring in resources and funding without taking out a loan or tapping an investor. Here are some of the most common.
Contribute personal equity or assets
There’s a good chance that as a founder you’ll use your own cash or resources to fund your business. It may be a one-time event or a regular occurrence depending on your needs, traction, and overall strategy. You can also help get your business off the ground by using assets and resources that you already have. This could be utilities, equipment, or anything else that helps you run your business.
Invest your profits
We mentioned this before, but a key part of the bootstrapping process is reinvesting your profits back into your business. While this may mean smaller payouts, it is a cost-effective and sustainable way to pursue business growth. It helps you prioritize decisions based on what may lead to the greatest impact and only pursue growth when you’re in a good position to do so.
Take on personal debt
There may come a time when you need more money on hand than you have available. This may require you to take out a loan, set up a line of credit, or open a credit card. More than likely, these will be under your name and not the business due to lenders and creditors relying on your credit history and assets to determine terms.
Form business relationships
Another option that doesn’t tie you into long-term debt is pursuing business partnerships. This may be complementary relationships with other businesses where you provide products or services in exchange for theirs. It can also be a short-term investment or debt from an investor. While the latter falls more closely to outside funding, the terms and quantity typically place more risk on the owner versus the investor.
Limit operations
Lastly, you may need to limit how much you sell or the services you offer. This may mean waiting to produce your product until after you hit an order threshold or capping the number of clients you take to avoid hiring more employees. The key is to avoid incurring costs until you absolutely have to.
This may mean slower production and missing out on initial growth opportunities, but it also helps you avoid overly investing when you don’t have the money.
Bootstrapping leaves it all on you
It’s only fair, after all. The bootstrapper takes all the risk, so she or he gets all the reward, too.
If you manage to build a company without outside investors, you end up owning it all yourself. You don’t have investors as bosses (you do have customers, but that’s a different article). You can make your own decisions.
That’s a good feeling when it works. It can be devastating when it doesn’t. So plan carefully. Don’t get yourself into a deep hole. Don’t bet money you can’t lose. Don’t bet relationships you can’t afford to lose.
It is possible to bootstrap your business and be successful. Just take the time to plan, keep an eye on your finances, and carefully invest when the time is right.
Resources to help you manage your personal investment in your business.
Bootstrapping FAQ
An example of bootstrapping is when an entrepreneur starts a business using their own personal savings. They continue to finance the company’s operations and growth by reinvesting its profits, rather than seeking external funding.
Bootstrapping starts with self-funding, typically from personal savings or revenue from initial sales. It involves strict budget management, cost-cutting strategies, and a focus on cash flow. It will often require the founder to handle multiple roles to minimize labor costs or even forego a salary for a certain amount of time.
Pros of bootstrapping include maintaining full control and ownership of your business, avoiding debt, and fostering frugality and resourcefulness. The cons can include slower growth due to limited resources, increased personal financial risk, and a potentially overwhelming workload for the founder.
The risks of bootstrapping include the potential for personal financial loss if the business fails, the pressure of solely bearing the business’s financial burden, limited resources which might slow growth, and the potential for burnout due to the need to manage multiple roles within the business.
