Have you heard of the phrase “pull yourself up by your bootstraps”? Well just in case you haven’t, it means that you should do something yourself, without expecting or needing help from anyone else.
When it comes to starting a new business, bootstrap financing (or bootstrapping) essentially means the same thing – it’s a way of starting up a company without any external financial help.
Why do people bootstrap their businesses?
In many cases, one of the easiest ways to raise finance for a new business idea is to give someone a stake in its future success and failure. This is known as equity financing, which is the basic principle for the TV show Dragons’ Den.
“Give me £10,000 and you can have a 10% share in my business.” If the Dragon accepts, the entrepreneur gets the money and the Dragon gets the shares.
However, with those shares come certain rights and a certain degree of control over the future direction of the company.
Many entrepreneurs don’t want to give away control of their business, particularly when they’re only just starting. In this situation, selling equity in return for capital simply isn’t a viable strategy.
So this is where bootstrapping comes in…
How does bootstrapping work?
Virtually all bootstrapped businesses start with finance put in by the owners themselves. Budding entrepreneurs invest their own personal savings to get the business going, sometimes incurring personal credit card debts to cover the start-up costs as well.
Depending on the owner’s financial position, they may not be able to put much more in after the initial investment. In these circumstances, the business may be expected to sustain itself.
This is done by ensuring that overheads and expenses are kept to a minimum, keeping as much cash in the business to keep it going and, hopefully, to eventually allow it to grow.
How does bootstrapping affect a business’s growth?
Using bootstrap finance to start a business can be a great way to get off the ground while retaining complete control. But it can also be severely limiting when it comes to the business’s growth rate.
Because it involves keeping costs as low as possible, bootstrapping usually results in certain activities which are necessary to growing a business further being cast aside.
For example, bootstrapped businesses do not usually enough money available to invest in aggressive marketing campaigns or in launching new product lines.
Sometimes, this can pay off. Particularly if the product or service is compelling enough that word-of-mouth can replace traditional marketing, and if the margins are high enough that there’s enough cash left over to invest in a new range of products and services.
Examples of businesses started by bootstrap financing
More businesses than you think were started by entrepreneurs who pulled themselves up by their bootstraps.
Here are some examples:
- GitHub: GitHub currently has 37 million users worldwide and was recently sold to Microsoft. However, initially, it was the brainchild of just three guys who worked on it in their spare time.
- GoPro: In 2017, GoPro took over $1 billion in revenue worldwide. But the company started from auspicious beginnings. The founder, Nick Woodman, made his first $10k by selling belts made from shells and beads from his van!
- SPANX: Today, SPANX is global underwear brand with stars as big as Gwyneth Paltrow and Jessica Alba as customers. However it was all started by one woman, Sara Blakley, and her life savings of just $5,000. To this day, Sara still has 100% control of the company.
Is there an alternative?
Today, bootstrapping doesn’t have to be the only option if you need funds to grow your business but don’t want to lose control of your baby.
We lend against the turnover of your business rather than your home or other assets. And you don’t have to have a perfect credit history to get approved either.
Apply today if you want to move your business to the next stage.
Bear in mind: This post is for general informational purposes only and doesn’t constitute professional advice. Make sure you consult with a professional advisor first.