How to bootstrap your business

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.

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.

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.

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.

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.

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.

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. 

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.

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.

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.

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